In Depth Briefing
GEICO can save you 15% in 15 minutes or less. "Everybody knows that." And Progressive Direct lets you "set your own price." So why shouldn't independent agents & brokers sell on price? Sure seems like a solid business model for those guys.For plenty of consumers, the price-saving offer is attractive. You could say it satisfies their fundamental values.
I’ll interpret that offer largely as, “Make it cheap. And let’s not talk too much about the actual insurance itself.”
I’m not here to argue with the consumer. It’s a bit like arguing with God. Mighty tough to win.
A core strategic question is to ask, "where will we play?" And one way to answer that question, of course, is to identify who you will "play with. Upon whom will you focus your resources? How will you create value for them? And how will you benefit from that relationship?
The common blunder is to consider "everyone" a prospect or a customer. Wisely focusing resources can have exponential effects. The abundance arises from the focus of resources, not their dilution.
Too many agents have fallen under the same spell that many consumers have. Perhaps they’ve heard the commercials so many times, they also believe it to be true: that price is the only thing that matters.
It is to some. Not to others.
Copying strategy is just not strategy. GEICO’s strategists, for example, did what strategists are supposed to do. Carefully examine both the real world - consumers, competitors, trends, etc. - and their own capabilities. They successfully aligned their capabilities with the interests of a discrete segment of the market. We don’t have their capabilities. That's okay. We have our own
Strategy means playing to your strengths. Copying the strategy of a major competitor or a competitive channel may be just what they want you to do: putting your weakness up against their strength.
A significant portion of the market actually cares what the insurance does. The focus of the independent channel should first be on serving them.
The others will be 1) more expensive to acquire and 2) less valuable in every financial measurement that matters.
I’ve identified 4 reasons independent agents and brokers should never sell on price.
1. Selling on price is one of two choices, and it’s the wrong one. You can be cheaper. Or you can be better.
You’ll meet a core strategic fork in the road at the very beginning of your strategic journey. Will you be cheaper? Or better?
Because you can’t be both. Selling cheaper means, of course, that you’ll generate less resource per person. How will you possibly create greater value with less resource?
If you’ve ever had the complaint, “My staff is so busy, they can’t _______,” your strategy may be causing that problem by “selling cheap and expecting your staff to do more.”
Value creation requires resources. If ever there was a time that the independent needed to put it’s best foot forward and create value, that time is now. (And yet, I’ve never seen so many so-called insurance marketers sell on price.)
Researchers from Deloitte, in the excellent analysis, The Three Rules: How Exccpetional Companies Think, studied the performance of 25,000 over a 45 year period and discovered three rules followed by the most successful long-term performers. The first is “Better before cheaper. They rarely compete on price.”
When the choice to be better is in your grasp, take it.
2. Selling on price kills profits and value.
Agency value is most generally based on some multiple of adjusted profit. EBIDTA. Price selling is a reliable route to profit and value reduction.
Let’s look at an agency with 20% operating profit. Increase your average sale per customer by 5%. Boom: margins go up 25%. Increase it by 10% - which is easy, by the way - and margins to up 50%.
An analysis by McKinsey & Co. shows that a measly one point bump in pricing on a modest company-wide profit of 12.5% generates an 8% increase in profits. Plus it delivers 50 times more value than a one reduction in costs.
If your margins shot up by 25-50%, how much real value could you add to your customers’ lives? Lots.
3. Selling on price is a fundamentally bad strategy for the independent agent & broker channel.
Why? Because where we go head-to-head with the direct channel on price, we lose. We're more expensive.
The direct channel has advantages that lean toward efficiencies - therefore price reductions - that the independent channel does not. The very core strength of the independent agent-broker channel is not cheaper. It’s arguably better. Not cheaper.
What is that core strength? The agent & broker, of course. By nature, independent, not under the control of the carriers, lacking single company process and behavior disciplines, it’s an added cost.
That added cost should deliver added value. It does not, however, reduce cost. That’s common sense. And it makes price selling a long term loser for this channel.
How can Warren Buffet afford a billion dollar annual ad spend? Because he can run a business model that operates on and focuses on efficiencies. And, yes, one of the “inefficiencies” that he has wrung out of the model is the independent agent & broker.
A.M. Best agrees.
The senior marketing executive of a national insurance carrier once told me, “My marketing budget is almost as big as GEICO’s. The problem is I spend most of it on agent commissions.” Ouch. Agents & brokers do more than market, but from a carrier’s point of view, the task of getting and keeping customers - marketing, in other words - is largely what they’re paying for. And it’s not cheap.
(As an aside, carrier reduction of agent commissions could arguably be the real unraveling of the system. Nobody will argue that this channel has to remain competitive. But, when the agent force is a core differentiator in the marketplace, making it weaker in times of turmoil won’t help anyone in the channel: carrier, agent or consumer. On the other hand, if the agent-broker is not leveraging that differentiation by deepening the customer relationship, they will continue to lose the confidence of both the consumer and the carrier. So, yes, I will take a very strong stand against commission reductions, but I’ll use the same soapbox to exhort the agency force to deliver on its promise of deeper relationships and better client protection. Earn your commission. Fair? So both sides can be mad at me!)
4. Selling on price is a fundamentally bad strategy for the independent channel because the clients you want will pay more. Much more.
The success of a business rests largely on its ability to listen to its customers and marketplace and to deliver on what they want or need. Bain & Company’s research reminds us not to paint all consumers with one broad brush.
Some consumers are just plain good for the direct channel. Hand in glove. And some are very, very good for our channel. Know the difference.
They point out that consumers are motivated by one of two fundamental values that drive their insurance purchasing decision. Price. Or peace of mind.
Price never goes away. The customer who stays at the Four Seasons instead of the Holiday Inn still wants to know what she’ll be paying. And still examines the bill at the end of her stay. But, her purchasing decision is driven by different values.
The price driven customer leans towards lower retention, fewer policies per customer, fewer referrals. Overall, they deliver much less lifetime value.
And, of course, the inverse is true for the peace of mind driven customer.
Deliver on their value, and they will reward you richly.
Shockingly, while the price value can never be ignored, the price flexibility available to the independent agent-broker channel is huge. Not “onesy-twosies” or five point tweaks that you have to fight for. Much, much more.
Several months ago, after I keynoted the Agents Council for Technology conference in Tampa, my friend, Brady Polansky from EzyLynx shared some data from the stage on this very subject.
How much more will a customer pay for insurance? Rather than guess or theorize, let’s examine actual consumer behavior compiled by EzyLynx.
First, let’s examine what percentage of customers chose to accept a quote that was higher than the lowest quote offered.
These are real world numbers. Real world consumers. Real world agencies. Absent any consistent discipline. Absent any consistent scripting. Absent any consistent management practice. Just agencies and brokerages behaving like they do every day, and consumers behaving like they do every day.
Only 43% of consumers accepted the first, lowest quote. 57% chose to pay more. (This example happens to represent personal lines property. Behavior concerning auto follows similar lines. Commercial lines was not part of this study, but reasonably, the complexity of commercial lines will generate even higher price flexibility.)
But, how much more will they pay? While some industries sweat blood for price distinctions of 5 points or less - groceries, for example - we do not suffer that burden. While GEICO may spend a billion dollars a year offering the possible savings of 15%, you may very well be able to say, “So what?”
That’s right. Progressively, starting with the second quote, they’ll pay 19%, 37%, 45% and 53% more.
And, what’s more, if you earn these customers’ loyalty, they will reward you richly. They will not only pay more for their insurance, they will stay with you longer. They will refer their friends and colleagues. They will consolidate their insurance with you. According to the same Bain & Company research, these highly loyal insurance clients will deliver seven times the lifetime value.
When I shared this research at a conference recently, a broker approached me and said, “This is it. This is all I need to know to create value in my business. This is my strategy. Nothing else makes sense.”
So, no, you don’t have to sell on price.
You should not.
- It’s a bad strategic decision. You can choose to be cheaper. Or you can choose to be better. You cannot be cheaper and better. The economics of cheaper prevent the execution of better.
- If you’re attempting to build a firm with high equity value and generous margins, sell at higher prices. Earn those higher prices, but sell at them. Selling cheap is a profit killer. And when you attempt to extract value from the firm, you’ll do yourself a favor by creating a culture that supports and a strategy that executes on selling at higher prices.
- Selling on price is a bad strategy for the agent-broker model. We’re more expensive. You’ll be fighting an uphill battle, when the downhill slope awaits you.
- The best consumers for this channel are not just willing to purchase at higher prices. They want the value that higher prices can deliver. And, as the research proves, they will be very valuable customers indeed.
The days where the agent-broker relies completely on the carrier and the carrier's product for value creation are over. Value must be added at the agency level.
Where did we go wrong? Why do so many agents & brokers continue to choose to sell on price.
I can theorize - and you can see what fits:
- Like so many consumers, they “suckered in” on the implicit GEICO declaration: that insurance is a commodity, and price is the only distinguishing feature.
- Their CSRs and producers complained about losing customers and prospects because of price. A handful of anecdotes became “truth.” They are not. Again, price never goes away as a consideration. But, generally what happens in these situations, the firm simply doesn’t deliver value or doesn't know how to communicate its value, so it loses on price. If my Four Seasons experience was just like a Holiday Inn experience, I’d switch, too. Platitudes about choice and advice don’t cut it. Customers and prospects need to experience your difference.
- Related to the above: the internal culture doesn’t support selling on value. The belief in value can’t be superficial. It has to be the conversation that takes place daily. This is what you talk about. At staff meetings. In performance reviews. Coaching. Walking about.
- The same with strategy. Every internal system and process need to be aligned with a value. If you’re not scripting, monitoring, mentoring, coaching and incentivizing the CSRs and producers in alignment with this strategy, it won’t work.
- The fundamental problem, however, is that the world has changed under the feet of the agent & broker. The core promise of delivering value through relationship became harder to deliver when a) firms got bigger and, critically, b) consumers came to expect you to “be there” in relationship, adding value. And “being there” requires a digital communication channel. Digital marketers are swallowing market share in the insurance industry, and theres a good reason for it. The good ones create relationship.
Digital insurance marketers can communicate frequently, unobtrusively, and add value at every point of contact. Unfortunately, the price-selling direct marketers have done this elegantly for almost ten years. They follow up, digitally. They reach out, digitally, They provide advice, digitally. They are beating us at our own game. And the marketshare reports prove it
The insurance marketer of today must be present with the consumer of today. The marketer must be a positive and meaningul presence in their lives.
Twenty years ago, agents & brokers were struggling with the question of whether they needed agency or broker management systems. The progressive agents answered that question for the industry.
Today, the industry faces the same question about digital marketing. The consumer has already answered that question for us…and the answer is “yes.”
Series: Mending The Broken Promise
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