LONG-TERM loyal customers are more valuable than other customers. They generally buy more often, spend more, have a higher retention and referral rate, and are less costly to serve. Any company with a database can measure the difference and prove to itself how valuable long-term loyalty is.
But how do you get customers to be loyal? How do you organize your company and channel to foster and reward loyalty? Most organizations are set up for acquisition. Few are organized for retention. Travelers Property Casualty Co. resolved this problem by working through its independent agents to build profitable relationships with customers.
Home and automobile insurance is a tough business. Because of vigorous competition and high acquisition costs, it takes several years before an auto insurance customer becomes profitable. If the customer leaves a year or two after being acquired, the insurer loses money. Travelers knew this, but until recently wasn’t able to do much about it. The firm does business through thousands of independent agents who handle insurance for many different companies.
Alison Bond, Travelers’ former director of national agency sales and operations (and now working at Customer Development Corp.-CDC), hit on a system that really paid off. She designed a series of customized communications with customers to build a relationship with them so they stayed with the companyfor a lifetime.
>From her previous experience, Bond knew that all similar programs >attempted at Travelers had failed.
However: Customers want communications. They like to hear from their insurance agents.
* To be effective, the communication should come from a local agent, not from national headquarters.
* A 1% increase in the customer retention rate would be worth millions of dollars in increased annual profits.
* To achieve this type of increase in retention, she would have to get 15% of the agents covering 25% of the customers to buy into her plan.
With CDC’s help, Bond had to sell the program to the independent agents. She met with a lot of resistance. They were not convinced that a retention program was valuable to them, that direct mail communications could affect when or whether a customer will defect, that the program would have an adequate return on investment, or that Travelers knew anything about their customers the agents didn’t already know.
Bond also had to deal with CDC experience suggesting that the corporate headquarters should subsidize communications programs, and with Travelers management that said “make the agents pay for everything.” She followed her management’s policies, and they worked very well.
What she developed was a retention program, built from a customer database, that offered a systematic way to deliver high-quality communications at very low cost. The messages were from local agents. Despite this, she provided the agents with a turnkey operation that was simple to buy into, and required almost no work from the agents themselves.
Bond came up with five annual “touches” that varied with the type of insurance the customer had, and the length of time the customer had been with Travelers.
1. Within 60 days of renewal: An annual policy review.
2. Within the first quarter: A thank-you card.
3. Within the second quarter: A cross-sell postcard.
4. Within the third quarter: A newsletter.
5. Within the fourth quarter: A seasonal greeting card.
She learned that for each customer, she had to constantly determine the appropriate message, the frequency of messages the customer wanted, the desired channel, the timing, and the likelihood of defection. Bond was armed with statistics showing 65% of the customers who defected never talked to an agent before they left. But 80% of the customers who had talked to an agent during the year did not leave.
What do customers want from their independent agents? A customer retention survey for personal lines customers conducted by the Independent Insurance Agency Association showed that:
* 52% of insurance customers were inclined to describe themselves as relationship buyers.
* Customers want an annual review of policy coverage.
* Customers want an agent with integrity who has a stable business.
Repetition is not necessarily a bad thing, Bond learned. Why? Because the average customer receives 1,186 mail pieces in a year. Families get more than 5,000 pieces. The five communications from the Travelers agent need to get noticed in all of this clutter. Customers tend to remember the message from their local agent, whereas they would forget a letter from a Travelers vice president.
The program was based on detailed analysis of the database. She used customer data and modeling to determine who was staying and who was leaving. She calculated customer profitability and lifetime value. Bond used these to drive her segmentation and retention strategy. Overall, she came up with a measurement of customer desirability. Now that she knew who Travelers wanted to keep, and what they were worth, Bond could execute a program to modify customer behavior through communications.
To get the agents to sign up, Bond had to make it easy for them. She sent them a kit describing the program. She gave them an 800 number to call, and recommended a standard package. She provided a Web site for them to review the status of their efforts, and provided regular reports. To sell agents on the program today, Bond shows them what happened to agents who bought the program in past years vs. those who didn’t. Agents who didn’t participate lost 17.3% of their customers in the first year; participants lost only 12.2%. With numbers like this, she could prove there was a good return on the agent’s marketing dollar.
Achievements What did the program accomplish?
To measure her success, Bond compared the retention rates of participants and non-participants. For auto insurance customers, she was able to raise the retention rate by 5%. For property insurance, the increase was 4%.
Why did Bond’s program succeed where others failed?
Hers was not centrally subsidized. With prior programs, agents risked nothing, while with hers, agents had their own money at stake. They wanted it to succeed.
Travelers’ program is a great example of what can be done to build profitable relationships with customers. It has all the right attributes:
* It is based on a customer database with purchase and response history.
* It is based on measuring customer profitability, lifetime value and retention.
* It creates custom communications from an agent customers know.
* It was sold to the agents, involves them, and enlists their enthusiastic participation.
* It makes customers happy, and Travelers profitable.
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