December 27, 2013
2 min read
We are getting close to a new year and most of us are thinking about what we can accomplish next year. In the growing agency, that includes deciding what a reasonable growth goal should be.
Each year in our business we spend a lot of time thinking about this. The factors that go into our thought process are:
1. The environment. What are average rates (and commissions) going to be like in the coming year? Are we in a hard or soft market? Are our carriers going to be more or less competitive?
2. What is our retention rate? Can we do anything about it? Regardless of what it is, it will definitely affect our growth plans.
3. What are we going to do about marketing and pipeline development? More marketing usually means more prospects and more sales. How much can we afford (I have some posts on this earlier in the year which you may want to reread like “How Much is a Customer Worth?”).
So, what if our retention rate is 80% (terrible) but rates are going to be up 10% next year (likely) and we have competitive carriers (OAA members do)? Let’s assume a $100,000 commission book of business. What’s our baseline look like?
$100,000 x 80% = $80,000 x 110% = $88,000
$88,000 is where we start the year. We need to add 14% more customers (at whatever our average commission per customer is) to break even. In other words, we need to “grow” 14% to stay even! That’s not encouraging…
BUT! If we work a lot harder to keep the customers we’ve got maybe we can increase retention to 90% (good). If we do that, how does next year look?
$100,000 x 90% = $90,000 x 110% = $99,000
Now $99,000 is where we start and we only need to “grow” 1% to get even! Suppose we decide to account round and sell 10% more in commission revenue to existing customers? Now what’s our math?
$100,000 x 90% = $90,000x 110% = $99,000 x 110% = $108,900
We’ve gone from shrinking $12,000 (even with significant rate increases) to growing 8.9% with no new customers! If you can do that and you can afford to do some marketing to bring in new customers, what can you reasonably expect to grow by?