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MARKETING COSTS AND PROFITABILITY

While it is true that a company can survive�even prosper�for a short period of time from positive profitability in any of a dozen functions, only marketing profitability can sustain a company for long periods of time. Therefore it is vitally important that a company�s marketing operation is, in fact, profitable.

If a company is in a market with a properly priced product, service level, or distribution advantage that cannot be duplicated by the competition or has a captive market, the company should be profitable, regardless of the circumstances. However, those kinds of situations are very rare. For most companies profitability can be achieved only through the use of superior financial fundamentals. This is simple to illustrate: In a broad sense, profit equals revenues less expenses. In other words, profit comes from high revenues and low expenses. Revenues are properly managed by controlling the fundamental factors associated with getting new business: field productivity, agent retention, and the persistency of policies.

Productivity refers to how much business agents write and how large the policies are. According to LIMRA surveys, the typical agent in a low-productivity company writes an average of 49 polices per year, generating approximately $50,000 of new premium. The typical agent in a high-productivity company writes an average of 69 policies per year and the average policy is larger; this agent generates about $90,000 of new premium.

Retention refers to how long an agent stays with a company. Typically,
4 years after contracting 100 new agents a company with average retention has kept 18 of them. However, in companies with good retention, the 4-year retention rate is about 30 percent. High retention rates have a direct bearing on company profitability in two ways: (1) The company avoids the expenses associated with recruiting and training additional new agents and (2) established agents have higher productivity than less experienced agents.

Persistency refers to how long policies remain in force and the insured pay premiums on them. The industry average is 86.5 percent�that is, 86.5 percent of the industry�s policies will still be in force 13 months after they are written. A typical company with high persistency has a rate of 92.7 percent.

Control of Marketing Expenses

The other factor in the profitability equation is expenses. It is impossible to market without expenses; therefore the key to profitability on this side of the ledger is to control marketing expenses. The principal trap companies fall into that keeps them from managing expenses as well as they could is marginal pricing�allocating less than full fixed costs or less than full overhead costs to a product. Marginal pricing can be used sometimes, but never over a long time period and never with core products. Too often companies use marginal pricing to gain entry into a market, planning to remedy the situation later. This rarely works, however, because the marginal pricing is aimed at capturing a target market share that never materializes, because cost improvement measures that will make a product profitable are never realized, or because competitive conditions force the price to remain low.

While the building branch of the agency system would tend to have higher costs because of its expenses for recruiting and developing agents, these expenses are often offset by the higher commissions and support service costs incurred by nonbuilding companies. LIMRA studies show that when all types of companies are analyzed, there are high-cost companies and low-cost companies in each distribution system, and there is a band of relatively profitable companies that cuts across all distribution systems. This tends to indicate that with good quality management, any distribution system can be profitable.

It is obvious just how important producers are to the achievement of profitability, especially in regard to retention and productivity. For the most part, and whether or not they now sell in a building or nonbuilding organization, how producers were recruited into the business and developed in the performance of their skills is a key to how well they succeed. Almost without exception, all producers share the same early recruitment and developmental experiences.

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