Despite the millions of dollars spent on advertising for insurance companies, many business owners still base insurance purchasing decisions on price.
Why is it that business insurance buyers are so focused on the price of their policies? Because…
- This is a business purchase decision. There’s little emotion involved. The boss will confirm that the purchase was a good one. The purchaser cannot make emotional decisions even if he wants to.
- It is a confusing and complicated purchase. Most buyers don’t want their ignorance to show so they keep their eyes on what they know. Because it is the currency used for all transactions, price is easy.
- If you haven’t had value-added insurance in the past, it can be difficult to imagine value-added insurance. Insurance is your buyer’s last claim experience. Buyers can’t measure the value of investing in a superior insurance program.
- Time is a scarce commodity for business purchasers. If they don’t believe the benefit of learning will outweigh the effort, they won’t spend the time to learn.
Are you ready to conquer these obstacles? Here’s how:
1. To create an offer that is appealing to your policyholders, you need to assess their needs.
James H. Gilmore, the author of The Experience Economy, stated that a company should learn about each customer so it can close the customer compromise gap. This is the difference between what individual customers settle for and exactly what each wants.
You can learn more about your customers by taking the time to understand their needs and preferences. This will help you to design your offer to make it more valuable to them. It may be that certain items have high perceived customer value and low delivery costs. Research is the only way to find out. Although customer research can be costly, it is essential for long-term profitability. A survey will help you identify customer perceptions, and focus groups will allow you to get in touch with key issues. For your research and offering development, segment your policyholders as closely as possible. It is easier to create value-added products for small segments that have similar needs.
Your research will help you determine the best way to communicate your offer so that the purchaser can easily measure the financial value of working with you. Insurance purchasers will benefit from industry specific examples, case studies, and testimonials to help them envision something that they have never experienced.
2. A unique value proposition (UVP), that is client-focused, differentiates and stands out to clients, can be created.
Progressive Auto Insurance did something that was unheard of in insurance. It offered price comparisons from other companies to its customers. It then advised customers to choose the company that would save them the most money, even if this meant choosing Progressive. What was the reason they did it? It was different, it attracted attention and created a lot of customer loyalty. This is an example illustrating differentiation in action. How can you surprise and delight customers?
3. Brand awareness can help you increase sales.
Brand Leadership is a book by Erich Joachlmsthaler and David Aaker that examines the causal relationship between stock return and brand equity. Equitrends brand power research found that companies with the highest brand equity gains saw an average stock return of 30 percent. According to the authors, brand equity and stock returns may be related to brand equity’s ability to support a price premium which in turn contributes to profitability. According to them, “When there is a high perception of quality, raising prices can not only increase margin dollars, but also help perceptions.”
Consistent marketing and communication programs can help you create a perception of quality. One specialty carrier was able reduce its marketing budget by 35% while trebling its revenues and increasing brand awareness in its target market. The company began by calculating the cost of exposure and cost per lead for each marketing activity. Here are the lessons learned by the company:
- High exposure costs and high lead costs were associated with tradeshows and sponsorships of golf events.
- Advertising was inexpensive per exposure but expensive per lead (it wasn’t easy to determine if any leads were generated).
- Direct mail was affordable per exposure and cost-effective per lead. Prospects and marketing activities can be easily tracked throughout the sales cycle.
- Public articles were more affordable than advertising, and they also had a higher cost per lead (again, it was difficult to track leads).
The company dramatically changed its marketing strategy, attending four tradeshows instead of 28 each year and sponsoring five tournaments of golf instead of 22. It also eliminated the bulk of its advertising and allocated most of its marketing budget for direct mail and published articles.
The company employed a pull marketing strategy, which was direct marketing to policyholder prospects. The company works with a small number of agencies so it was able co-brand many marketing efforts with the agencies that were appointed. Everyone benefited.
Direct mail may not be a good fit for your business model. You can still combine your efforts by ‘pulling” policyholders via published articles in industry trade journals and ‘pushing’ the brand through direct mail campaigns with appointed agents. The key is to eliminate activities with high cost per exposure and high cost per lead, and replace them with activities that generate strong return-on-investment. Although expenses are managed, a perception of quality is created which makes it easier to charge a higher price.
4. Groom your internal culture to deliver your marketing promise.
Disney’s mantra is “Marketing creates the brand, but training brings it alive and keeps it fresh for customers and employees.” You’ve probably seen this mantra in action if you’ve been to Disneyland. Disney lives up to its marketing promises! You must align your policies, procedures, and hiring practices with your marketing promises if you haven’t already. Your retention rates will depend on it. These statistics were provided by Frederick Reichheld. Loyalty:
- Retention of a customer is five times more expensive than acquiring a new one.
- Companies lose between 20-25 percent and 25 percent of their customers every year.
- A company can increase its bottom line by 25 to 75 percent if it reduces attrition by five percentage points.
Imagine Fred Smith calling his insurance company to ask a question about coverage. He is placed on hold for five minutes. He is frustrated and tries to use the website. It fails to submit the question form. It doesn’t say if the form was successful. Could this be your company’s?
Too often, there is a huge gap between what the marketing promises and what the customer actually experiences. Although a minor glitch in the website or a long hold time may seem small, they can be huge if you have an alternate expectation. Costco is a great example of this – everyone pays attention to the details. If you want to sell quality, you must ensure that every customer interaction is quality or you will lose them at renewal.
5. To optimize pricing, strategically focus your retention efforts.
Ask your financial analyst or actuary to help you determine the revenue and cost of service for each segment. There are many ways to look at different segments: by size, industry, agency, policy type, etc.
To determine how much money and time should be spent to keep each customer segment happy, plot your customer segments onto this grid:
Low Cost of Service/High Revenue
- Retention: Allocate the largest amount of money
- Incentives for agencies
- Service can be improved to meet customer needs
- Establish a relationship
High Service Costs/High Revenue
- Low cost retention activities
- Reduce the cost of your service by finding ways to do it cheaper
Low revenue/Low cost of service
- Increase revenues by finding ways to do so – e.g. Up-sell or Cross-sell
- Low-cost retention activities
Low revenue/High cost of service
- Service pricing can be increased or decreased
- You might consider ending the relationship
According to the Direct Marketing Association retention rates tend to stabilize after the second sale. A test purchase is the first. Two-time buyers are fully informed and buying for the second time. A two-time buyer, or someone who has renewed a policy previously, is the best target for retention and cross-sell and/or up-sell efforts.
Their McKinsey Quarterly article explains. Race to the Bottom Companies should carefully evaluate the ‘willingness of a competitor to fly into their arms’ factor when evaluating customer value, retention spending, and price optimization. According to them, “If a customer switches easily, retention efforts should be directed at other customers, as the chances of success are small.” Managers need to understand that losing fickle customers is better than keeping them at low prices. This approach reduces margins for all customers, even those who are more price sensitive.
There are many ways to alter a price.
1. Modify the price tag (the obvious).
2. Modify the amount (deductibles, limitations)
3. Change the quality (coverage or service level).
4. Modify the terms (service level, payment terms, policy length).
Creative and strategic thinking are key. Your price should be clearly stated and agents given the tools to help them sell it. Every value-added service should be accompanied by a monetary price. If three consultations on accident prevention are included in the policy, assign a price for them. It should be easy for the buyer and their broker to justify a higher premium. Talk about the benefits of investing in an insurance company that will increase experience over the long-term. Highlight the differences in coverage so that it is clear that there can be no comparison between them. Remember to include success stories, testimonials, and case studies in your sales presentation so that your prospect can see the benefits of having you as his partner.
Buyers who raise price objections also spend $3 on their coffee and $300 on their sunglasses. It’s not an objection at all – it’s just a convenient excuse for those who lack understanding and desire.