The Importance of Customer Retention
Technology has revolutionized the way insurance is bought, sold and serviced. Agents can now automate entire email and direct mail marketing campaigns, distribute sales literature on demand without even having to hit a button, provide “quotes” automatically over the Internet, and even obtain customer “signatures,” legally binding, verifiable signatures, via e-mail.
The temptation is strong for tech-savvy but lazy agents and agencies to rely on technology to slash prices acquire their customers and to grow. But new research from Bain & Company is suggesting strongly that that path leads to stagnation.
According to Bain’s extensive report, Customer Loyalty in P&C Insurance. U.S. Edition 2014, the property and casualty market seems to have bifurcated into two basic kinds of providers: retainers and acquirers.
The problem lies in the kinds of customers you attract with a primarily online approach to customer acquisitions: These carriers overwhelmingly attract very price-sensitive customers – customers who exhibit little or no loyalty when the chips are down. Case in point: According to reporting by Hannah Bender of PropertyCasualty360.com, over half of customers who switch carriers because of price do so to save less than 20 percent on premium. What’s more, 1 in 4 of these price-sensitive customers switched to save 10 percent or less.
Not much of a marriage.
So who are these easily-seduced customers? As you may expect, they tend to be younger, more comfortable with technology and they tend to use the Internet to find their insurance providers rather than go through a flesh-and-blood agent or even a call center.
They also tend to have less complex insurance needs – requiring fewer layered or stacked policies and riders – and lower premiums.
Most tellingly, according to Bain’s research, these price-sensitive customers make poor missionaries. Bain came up with a proprietary metric, the Net Promoter Score, to quantify the future value of a customer base based on their collective propensity to recommend or refer their insurance carrier to friends or colleagues.
Graded on a scale of 1 to 10, those who reported their own likelihood to refer friends or colleagues to their own agent or carrier as a 9 or 10 were classified as ‘promoters.’ A score of 7 to 8 was rated a ‘passive.’ And scores of 0-6 were labeled as ‘detractors.
The Net Promoter Score is simply the carriers’ percentage of promoters, minus the percentage of detractors.
The metric is useful and effective in predicting the number of monthly premium payments the carrier will receive, the number of P&C products from the carrier owned by the customer and, most dramatically, the number of referrals the company would eventually receive:
“Promoters” referred 5 times more clients to the carrier than “detractors,” and were less than half as likely to criticize the carrier to others. Furthermore, “promoters” had more than twice as many referrals and recommendations than “passives.”
All told, the lifetime value of a “promoter” customer is nearly three times more than that of a “passive,” and seven times more than a “detractor,” according to Bain’s analysis.
Naturally, those companies that are most successful at acquiring customers were also those who spent the most in advertising. There was a direct correlation between success in new customer acquisition and advertising costs: Those who were the most successful at acquiring new customers spent more than 50 percent more per new customer than the – but the advertising tended to attract price-conscious clients who were less likely to refer their carrier, and who were more likely – with some exceptions, like USAA – to bolt at the whiff of a few dollars a month in premium savings or some customer service problem.
Those who worked with a live agent – or at least with an assigned person at a call center – tended to be more loyal than those who interacted with the company only via the Web.
The Value of Selling “Peace of Mind”
Bain’s data found a link between customer retention and selling message. Those companies that focused their messaging on “peace of mind” themes signed up fewer new customers than those focusing on being the low-cost provider. But those who were motivated to buy through an appeal to peace-of-mind had a much higher lifetime value than price-focused buyers.
These companies had a customer base that is older and more affluent than the price-seekers. Those companies whose messaging was focused more on peace-of-mind marketing were also more successful in retaining their customers.