Lowering Customer Acquisition Costs in the Insurance Industry

Customer acquisition costs are a familiar problem throughout the business world. On average, businesses spend five times more to acquire a new customer than to keep an existing customer, according to Khalid Saleh at Invesp. Companies focus more attention on acquisition than retention, too: About 44 percent dedicate themselves to acquisition, while only 18 percent focus on retention.

For insurers, customer acquisition is even pricier. “The insurance industry has the highest customer acquisition costs of any industry. It costs seven to nine times more for an insurance agency to attract a new customer than to retain one,” says Lynn Thomas, president of 21st Century Management Consulting.

While customer retention strongly impacts insurers’ bottom lines, new customers are essential in order to maintain a steady pace of growth and build a competitive edge. Controlling costs while still attracting new customers presents a challenge for insurance companies.

How Expensive Are New Insurance Customers?

When you compare the high price of customer acquisition with the low net margin of property and casualty insurance — which hovers between three and eight percent, according to Mary Hall at Investopedia — It’s easy to see why acquisition costs are a concern.

Direct insurers have had an advantage in this area for quite some time. As early as 2014, William Blair & Co. analyst Adam Klauber determined that direct insurers like Progressive and Geico paid an average of $487 to acquire a new customer. Meanwhile, captive insurers like State Farm and Allstate paid $792 on average.

When independent agents were added to the mix, Klauber said, the average cost of customer acquisition rose to $900 per customer.

One reason new customer costs are so high in insurance is that the industry has lagged in adopting digital technologies that meet the expectations of today’s insurance shoppers, say Tanguy Catlin and fellow researchers at McKinsey.

Customers want simplicity, 24/7 availability and quick delivery. They also demand clarity about pricing, value and services designed for the digital age, no matter what they’re shopping for. “They have the same expectations whatever the service provider, insurers included,” say Catlin et al.

Improving technologies also helps transform customers’ perception of insurance as an outdated, unapproachable industry to one that is personalized and consistently present. When insurance is easier to access, customers are more likely to see it as a valuable and important facet of their lives.

Lowering Customer Acquisition Costs
KPIs in Customer Acquisition

It’s important to differentiate between customer acquisition cost (CAC) and cost per acquisition (CPA). While they sound similar at the outset, Proof’s Drew Housman outlines the difference. “CPA measures the cost of an action, CAC measures the cost of acquiring a customer.”

For example, if you want to measure the effectiveness of clicks on a digital ad or buy button, use CPA. To factor in every click a customer makes on their way to completing the transaction, use CAC.

Tracking both CPA and CAC is important, however, because not all methods of acquiring new customers yield results in the same period of time, says Gordon Donnelly at WordStream. For instance, combining SEO and content marketing with Google and Facebook advertising results may make insurers think their SEO is overperforming while their advertising is underperforming. This is because SEO and content marketing “typically take longer to yield results,” says Donnelly.

While a good customer acquisition cost varies by the type of insurer, one way to track CAC effectively is to balance it against customer lifetime value (CLV), says Jordan Ehrlich at DemandJump. Customers who offer a higher lifetime value may be worth more to acquire at the outset.

Ideally, the ratio between CLV and CAC will always show a higher number for the former metric: A customer’s overall value will always be higher than the cost to acquire them. “The less it costs you to acquire a single customer and the more overall value that customer represents, the more profit you stand to make,” says Donnelly.

Treating customer acquisition, retention and value as three facets of the same goal can improve insurers’ ability to attract, retain and profit from customer relationships. “Since new policyholders immediately become current policyholders, your improved customer experience increases the likelihood that they will stay with your company, refer you to others, and so on,” says Patricia Moore at One Inc.

Lowering Customer Acquisition Costs
How to Lower Costs Without Losing New Customers

Cutting customer acquisition costs won’t help an insurance company if it also results in fewer new customers. Fortunately, there are several effective methods for reducing these costs while improving the quality of new customer relationships.

1. Use Incidental Channels

Incidental channels are products or services that deliver value separately from insurance, but that build a customer relationship and gather data that ultimately support an insurance relationship, says Kyle Nakatsuji, principal at American Family Ventures.

These channels can help lower customer acquisition costs and improve engagement by demonstrating value to customers early in the process. Customers are more amenable to an eventual insurance purchase because they’ve already received value from the service and have perhaps considered how insurance could further improve that value. These services can also perform data-collecting functions, making it even simpler for new customers to choose and purchase coverage, says Nakatsuji.

2. Leverage Retention by Seeking Referrals

An added benefit of incidental channels is that they make it easier for your current customers to recommend your insurance services to potential new customers, says Srikumar Rao, author of Happiness at Work.

For example, imagine an app that helps homeowners identify and mitigate the most common causes of household fires. When a loyal customer uses the app, benefits from it and recommends it to others, that customer “is no longer a supplicant when she draws the attention of her contacts to you. She is the enthusiastic and proud bearer of a gift. She has bounty that she will bestow on the deserving,” says Rao.

Not only have you made it easier for your loyal customers to refer their associates to your company, you’ve made it gratifying to them to do so.

3. Recognize Why Loyal Customers’ Referrals Matter

Customer retention has a profound effect on the bottom line. When customer retention increases by only 5 percent, profits increase by 25 to 95 percent, according to research by Frederick Reichheld at Bain & Company.

Nurturing relationships with existing customers builds trust, allowing companies to offer additional products and services with a lower chance of rejection, says startup advisor Yoav Vilner. It also increases the chance of attracting new customers through referrals — by far one of the least expensive methods of customer acquisition.

Referrals, or word of mouth, account for 20 to 50 percent of all purchasing decisions, say Jacques Bughin, Jonathan Doogan, and Ole Jørgen Vetvik at McKinsey. Experiential word of mouth, in which existing customers share their own firsthand experiences with a product or service, is perhaps the most powerful. It’s also the most common: 50 to 80 percent of word of mouth marketing is based on a consumers’ personal experiences.

Loyal customers are more likely to speak highly of their insurance company when services exceed their expectations, say Bughin and fellow researchers. As a result, insurance companies that underpromise and overdeliver stand a better chance of generating praise and referrals from their existing customer base.

When should insurance companies ask for referrals? Sooner is better, says Eric Wlison, national account director at Kaplan. Waiting until a customer’s transaction is finished increases the chances that something might go wrong, spoiling the customer’s inclination to speak positively of their insurance company to friends and family.

“Remember that it is human nature to want to help others succeed. If you don’t ask for referrals you’ll likely get zero, and if you ask and get zero you are still at the same spot as if you hadn’t asked,” says Wilson.

4. Embrace Digital Tools That Promote Loyalty

Here is where customer loyalty and technology intersect to drive down the costs of acquiring new customers.

Nearly every consumer-facing industry has grappled with how to meet evolving customer expectations. Any fast food restaurant will offer bundled meals as well as a la carte menu items from which customers can choose. Even change-averse airlines and cable providers have learned to offer customizable levels of service because that’s what their customers have demanded.

This is the point the team at McKinsey is making when they say insurance customers want simplicity and quick delivery. Today’s customers want to be able to choose from any and all available product lines, regardless of which carriers provide them.

This is what the BOLT Platform facilitates. Our users are able to offer and sell their own products alongside bundled products from other carriers because, ultimately, the customer only cares about getting the coverage they need. The best way to meet this need is to become a one-stop-shop for your customers.

Insurance companies that embrace this will earn increasing customer loyalty. And as new potential customers come forward, it will require less time, less money and less effort to convince them to buy.

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