UPDATES

The Five Profit Zones: Part One

Money, in and of itself, is rarely the true motivation for entrepreneurs. It’s what you can do with money that truly motivates people. For some, money equals financial freedom—the ability to do what you want to do, when you want to do it. Whether it’s supporting your family, your community, your church—whatever, money enables you to do so. To others, money equals time and the resulting freedom to indulge in the things you really love doing.

What you do with your money is your choice. However, you must first earn the money, which means you must create profits.

There are five profit zones that agency owners and managers should actively manage. All too often, I see people looking only at their bottom line. Very few break it down to see what is actually impacting their profits.

Profit zone #1: Accounts

Never allow profitable accounts to subsidize unprofitable accounts.

Here the goal is very simple: Every account must create a profit.

As a consulting firm, we started looking at account profitability decades ago, and created a tool called the Account Profitability Analysis (APA). Essentially, it’s a cost accounting method we’ve used to evaluate the profit centers at more than 1,500 agencies over the years. Using the APA, we can determine how profitable each account segment is, in terms of: income, allocable expenses and amount of profit/loss in a particular segment.

For example, if we were manufacturing two different types of widgets, we’d want to know whether we’re making a profit on each of them individually, as well as an overall profit. It’s the same with the insurance industry. As we’ve discussed before, agencies have A, B and C accounts, some of which are more profitable than others. According to our APA:

“A” accounts (the top 5% that generate 50% of the commission income) create a 30% to 40% profit;
“B” accounts (the middle 15% that generate 30% of the commission income) create a 54% loss; and
“C” accounts (the bottom 80% that generate 20% of the commission income) create a wide range of profitability, from a loss of 20% to a profit of 35%.

We have identified six major factors that negatively affect account profitability:

Part-time clients. You don’t write the total account, thus you have low revenue per relationship.
Producer compensation. Paying too high a rate on new and renewal commission. We still see some agencies paying 40%.
Payment on all accounts. Some agencies pay on every single account with no minimum account size.
Retention. Not having a full account equals lower retention. Conversely, writing the total account is the #1 exit barrier.
Over-servicing. All accounts get the same treatment and attention. While we believe that every account deserves the level of service they pay for, we’d do better to have service standards by type of account.
Underutilized automation. The agency has the latest and greatest automation, but it’s not being used efficiently or productively by the internal staff.

Profit zone #2: Producers

Never allow profitable producers to subsidize unprofitable producers. This does not apply to our new producers, still in training. But once they’re past training, they need to be creating a profit for us. The concern is that we have long-term, “overpaid” producers (due to compensation issues) who are also “under-grown,” in that they’ve already plateaued. Normally agency owners are the ones subsidizing the non-owning producers. If you’re an owner, how would you like to be paid a full commission on your book of business? Unless you can do that, you’re subsidizing others. Following are the major factors affecting producer profitability:

Compensation. Again, over-paying.
Stagnation. When producers plateau, they stop growing. If they don’t grow, you don’t grow. As a result, there is very low net new revenue.
Low overall revenue per producer. Producers’ books of business are simply too small to carry the additional weight of ongoing expenses such as employee benefits, support staff and administrative expenses.
Too many systems. By “systems” we mean that everyone is doing it their own way—not the agency way. There are multiple offenses and multiple defenses, which contribute to low revenue per employee and low spread per employee.