March 10, 2020
What is Spread?
2 min read
I've talked before about the importance of knowing your numbers. By this, I mean more than just your net profit percentage. Great agency owners are great business people and they spend time each month reviewing a host of variables in their business. They know this is critical to driving their bottom line number higher and higher.
One of the least used and most valuable statistics to measure in any business, but particularly in a service business, like an insurance agency, where payroll is the largest expense is “Spread”. What is Spread?
Spread is the difference between the average revenue you produce per employee and the average compensation of all your employees. Spread in a service business (like an insurance agency) is like the “Cost of Goods Sold” or materials cost in a manufacturing business. Spread is a measure of your agency's gross profitability. All things being equal, the higher your spread is, the bigger your bottom line will be.
Many agency owners I know want to grow their agencies as large as they can because they believe that doing so will allow them to enjoy the advantages of scale. Larger agencies certainly enjoy bigger spreads than smaller ones, but not necessarily for the reasons you might think. If we consult the “Best Practices Study Update for 2018” published by Reagan Consulting, and the Independent Insurance Agents and Brokers of America, we see that spread gets bigger as agencies do.
The difference in Spread, that gross measure of agency profitability, is 30% higher when you go from the smallest agencies, to the largest agencies in this study. What's interesting is that this is true even though compensation per person more than doubles when going from smallest to largest.
I remember visiting an agency whose owner was frustrated and she was thinking of calling it quits and selling her business. She was working more than full time but not making any money. When I counted noses in her agency, I found that she had seven employees including herself, in a business with $250,000 in revenue. That's a revenue per person of less than $36,000. Though she was in a small community and paying many of the people minimum wage, it was easy to see the problem. Smaller agencies indeed tend to pay smaller compensation to service employees. But it's also true that they tend to expect far less from them in terms of productivity than large agencies do. This is where the opportunity lies: to improve spread and increase profitability.
To improve spread, and improve profitability, focus first on driving productivity. In commercial lines, the largest agencies service people manage books of business with $390,000 in them, whereas the smallest agencies only have $270,000. The producers in large agencies also produce dramatically more in total revenue, as well as new business. In personal lines, the difference in book size among service people isn't as dramatic, but the average book size of a producer is nearly three times more in a large agency than in a small one. This is true while the producer's compensation is only twice as much. You can see that the average compensation per person as well as revenue per person both factor into Spread.
What are your numbers? I encourage you to figure them out and then compare them to those in the study. What is it that you need to do to improve your Spread?