June 11, 2013
You've Got to Spend Money to Make Money
2 min read
Any businessperson will tell you that the title of this post is a lot of crap!
Spending money is just sending money out the door in exchange for stuff. The stuff may be office equipment, supplies, payroll or anything else that is tangible or intangible. Making money has nothing to do with spending money.
However, investing money is critical to the growth, and even to the very life, of every business!
What’s the difference? When you invest you risk losing your money and you risk getting nothing in return for it. But, if your risk is carefully calculated, you have a reasonable expectation of not only getting your money back, but also making a return or profit on it.
This isn’t just semantics. Businesses waste tremendous amounts of money on all kinds of things that aren’t investments. Customers aren’t one of those things. Customers require investment. They require to be gotten and to be kept.
How much is a customer worth from an investment point of view? I don’t know the answer to that because every agent’s (investor!) required rate of return is different.
But for grins let’s assume you required a 7% ROI AND 100% return of investment. That’s a very strong return. All your money back and 7% annually to boot. Lots of people want that. How can you get it in an independent insurance agency?
Well, if your average commission per customer is $450 and you invest $450 to get another one. That is the result you get over 4 years at a 90% retention rate! Now, if your retention rate is only 80% your ROI is only 1.2% per year. But you do get all your money back.
If you can secure another customer for only $225 your ROI is over 52% per year at 80% retention! Plus you get your money back! At 90% retention the results are stunning – 63% average over 4 years ROI! Plus your capital back!
What do we learn from this? First, retention is very important! Perhaps we should invest something in increasing our retention rate. Second, we learn that it’s worth investing money to get more customers. There’s likely no better business to invest in that your own.
Are you getting more customers every year? How much are you investing to get them? What’s your retention rate? How much are you focused on increasing it?