P&C insurers face many challenges regarding customer retention and relationship-building. For one, the number of customers shopping for car insurance has decreased in recent years, according to Jim Gorzelany at Forbes.
Among those who still pay for auto or home insurance, easy access to information means that many customers purchase coverage based on price alone. Perhaps this is why the likelihood of a business selling to a new customer is only 5 percent, versus 60 percent for current customers, explains Monica Eaton-Cardone at NewsMax.
Fortunately, increasing customer retention rates by just 5 percent can increase profits by 25 to 95 percent, says Bain & Company’s Frederick Reichheld. Where an insurance company falls in that range will have profound impacts on its ability to compete in the P&C market.
To improve profitability through relationship-building, tracking customer lifetime value data (CLV Data) is a must.
What Is Customer Lifetime Value?
Keeping an existing customer can cost five times less than attracting a new one, says Khalid Saleh at Invesp. However, it’s important to track the cost of maintaining customer loyalty. If customers aren’t providing increased value over time, the cost of maintaining that loyalty could prove to be inefficient.
That’s where CLV data comes in. CLV is “the net present value of a customer after deducting the expenses from the revenues earned for the said customer,” says Sandeep Sisupalan, data scientist and researcher at AiSensum.
It’s calculated by subtracting the expenses accrued in finding or keeping the customer from the revenues the customer has contributed to the company.
Clint Fontanella at HubSpot recommends breaking down CLV data even further, by calculating four numbers:
- Average purchase value. That’s the total revenue divided by the number of purchases.
- Average purchase frequency rate. That’s the number of purchases divided by the number of unique customers buying.
- Customer value. That’s the average purchase value times the average purchase frequency rate.
- Average customer lifespan. That’s the total time customers stay with your company divided by the number of customers.
Then, Fontanella says, calculate CLV by multiplying customer value by the average customer lifespan. The result indicates how much value you can expect each customer to contribute to the company during the course of their relationship.
This number can then be used to compare the performance of individual customers. By changing the time periods chosen when calculating average purchase value and average purchase frequency rate, insurers can also examine a customer’s value over various time periods. Different groups of customers can also be analyzed to determine the CLV of the average customer within that group.
In addition, tracking information like repeat purchases and referral values can provide a more nuanced picture of a customer’s value to the insurer, says Jessica Oman, planner in chief at Renegade Planner.
Insurance companies can use CLV data to evaluate a customer’s amenability to cross-selling or up-selling policies. The company can also immediately determine whether a new customer has similar qualities to existing high-value customers, says Sisupalan.
Why Tracking Retention Rates Isn’t Enough
Tracking customer lifetime value differs from merely tracking churn or retention rates. Retention rates can tell insurers how many customers stay and for how long, but what matters is why customers choose to behave as they do, says Jill Avery, a senior lecturer at Harvard Business School.
When businesses track CLV data, they gain insight not only into why a customer stays, but what they do for the business while they’re present.
“While you can measure your cost per lead and retention rates, they don’t tell you much about how long those customers are sticking around or what they’re buying. This is where lifetime value comes in,” says Samuel Thimothy, vice president of OneIMS and co-founder of Clickx.io.
By tracking lifetime value, insurers can determine whether certain customer segments — or even customers as individuals — are boosting the company’s growth or hindering it.
How Tracking CLV Data Improves Customer-Focused Strategizing
ACORD president and CEO Bill Pieroni says that high-performing auto insurance companies are capable of balancing four key strategies: product leadership, innovation, operational excellence and customer intimacy.
Tracking customer lifetime value gets to the heart of customer intimacy. Metrics like retention rates allow insurers to ask how to keep certain customers; CLV focuses on why certain customers deserve a insurer’s focus.
One of the goals of tracking customer lifetime value is to determine who your VIP customers are, says Jia Wertz at Forbes. Depending on the company’s goals, its VIPs may be the customers who spend the most on coverage, who refer the largest number of new customers or who provide the most value by engaging with an insurer’s brand via social media.
“Once you have identified these VIPs, implementing a customer segmentation marketing strategy for each subgroup allows you to maintain the relationship and even glean insights on how to convert more customers into these VIP groups,” says Wertz.
Knowing who your most valuable customers are also helps insurance companies to make better decisions about marketing and product development, says Jeff Desjardins in Business Insider. “The higher the value, the higher the marketing budget can be to acquire each customer,” says Desjardins. Insurance companies can also choose to invest more in retaining high-value customers over time with premium discounts or other perks.
How to Start Relationships That Last
Once an insurance company understands the average and predicted CLV of its current customers, it can use that information to pursue new customers with the traits that predict a higher than average CLV, says Mike Parsons, a partner at Datamine.
For example, Parsons explains that marketing teams can use a CLV score to understand which potential customers are most likely to pay high premiums and not claim. Then, this information can be leveraged to acquire such people as customers in order to bring the business more money.
Keeping Customers Happy and Paying
Over the long term, it’s important to balance customer expectations against CLV data. For instance, insurance companies that become too attached to a high CLV may fail to realize that long-term customers expect preferential treatment, Paul Talbot writes at Forbes. They might expect rewards like premium discounts or improved service in exchange for their loyalty.
“A failure to resolve these two contradictory assumptions won’t just upend the numbers behind CLV. It can send misunderstood customers running for the exits,” says Talbot.
Instead, it’s essential to understand why customers behave the way they do. And the CLV itself can be used to offer the perks that long-term customers want without undermining the value those customers bring to the company.
For instance, insurers focusing on CLV can balance rising premiums with customer retention, says Arthur MIddleton Hughes at the Database Marketing Institute. Customers with a higher CLV, particularly one developed through long-term loyalty, tend to pay more over time as they earn more, purchase more expensive cars and add items to their auto or homeowners policies.
Since customers tend to cost the most in their first year, says Hughes, focusing on nurturing relationships in the long term can help ensure that a customer’s CLV stays in an insurer’s preferred range.
CLV and Insurer Competitiveness
Finally, evaluating customer lifetime value can have a profound effect on insurance company mergers and acquisitions, a growing area of insurance industry activity.
In a study published in the European Management Journal, researchers Michael Haenlein, Andreas Kaplan and Anemone J. Beeser note, “From a marketing perspective, M&A transactions are nothing other than the acquisitions of the customer base of one company by another one, usually based on the assumption that the acquiring bank can manage this customer base more profitably than the selling bank was able to.”
As a result, a strong understand of customer lifetime value affects not only an insurance company’s standing in M&A negotiations, but its overall value and competitiveness within the insurance industry. Calculating and tracking CLV, then, helps insurance companies maintain their own footing and reputations as well as provide better service to customers.
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