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July 10, 2018

How to Build Customer Loyalty in Insurance

Summary:

Discounts don't build loyalty. But remember Maya Angelou’s famous quote: “People will never forget how you made them feel.”

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Always the same story: 11 months after a costly customer acquisition, crafty price comparison players and other intermediaries helpfully knock on the customer’s door, show a smorgasbord of supposedly better value options and outline how easy it is to switch.

For example, 16% of Americans shop around for car insurance every year, saving up to 47% of the previous year’s insurance cost. This represents an impact of up to $40 billion on the $500 billion car insurance market.

What’s great for the consumer is a major headache for the insurance provider, which often has to join in the dreaded price war to keep a customer.

In many other industries, having a good brand is a bulwark against a price race to the bottom. But for immaterial and low-involvement products such as insurance, this is easier said than done. It’s hard to stand out in the customer’s mind and become a provider of choice.

But there are a few things insurance providers can do to survive the first-year itch and give the customer an experience that will greatly increase the odds that they’ll stick around for another year.

Before we get into the specifics, it’s important to understand one key principle of loyalty, which is best illustrated by Maya Angelou’s famous quote:

“People will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

That’s why discounts don’t lead to loyalty. Sure, it’s sweet to get a $150 bonus for staying with your current life insurance provider, but once the money hits the bank account it just dissolves into the family budget, never to be seen again. It’s not memorable, and it sure as heck doesn’t make the recipient feel much of anything.

Contrast that with what you could actually DO with $150:

What if you gave your customers an experience such as a kayaking tour or a candle light dinner for two? The cost would still be some $150, which is close to what a bonus or discount would amount to — but the effect is far stronger.

Why?

Because the customer associates the experience with you. In the back of their minds, they know, as they’re tucking into their entree or dipping their oar into the turquoise waters, that this experience comes courtesy of Insurance Co. And that association works on a subconscious basis and lasts far longer than any discount could.

You may argue: Why wouldn’t customers be able to do it themselves with the $150 check they received from you? After all, they just received a discount of $150, so you might as well encourage them to spend it on that kayak tour, right? All without going through the hassle of organizing it on your end.

Not really. Most people don’t operate that rationally, and hardly anyone would take a windfall gain and spend it on something specific. It’s more restrictive to give them $150 in kayak or dinner vouchers, but that restriction means that they are far more likely to use it. And you WANT them to use it.

See also: What Really Matters in Customer Experience

The effect is obviously not limited to dinner experiences, although that one is quite the front runner when it comes to a memorable experience at an affordable price.

Other perks that suit an insurance company’s first-year-itch-avoidance budget would be:

  • A luxury case of wine
  • Two tickets to a rock concert or musical of the customer’s choice
  • An afternoon at the local spa
  • A cooking class
  • VIP cinema tickets for the entire family (customize it by asking them how many tickets they want and providing any number of them — within reason)

It’s important that the item or experience you provide be non-utilitarian. A new vacuum cleaner or blender won’t do the job as well as a cheese and wine tasting night out. To be a memorable experience, it needs to be non-quotidian and give a hint of luxury or, dare I say, décadence. Yes. French spelling.

So how much can it cost?

Well, that depends on how much you can afford. If you, with a heavy heart, normally provide a discount of $150 to keep a customer with itchy feet, providing an experience worth $150 is the starting point.

More bang for your buck through breakage and volume discounts

But that $150 can go a much longer way and you’ll be able to magically turn it into $200 or more in the following way:

First of all, if you do this at scale, you’ll be able to secure discount rates from the vendors. A restaurant chain will gladly give you a discount if you buy 100 candlelight dinners from them.

Second, there’s breakage. We’ve written extensively about the concept — in short, breakage is the rate of unredeemed dinner experiences (if we can stay with the dinner example). Some people will end up not redeeming their gifts. How should you deal with this, though?

On the one hand, if you want to focus on short-term profit, this is good for you, because the user has accepted to stay with you for another year without creating any cost — because they haven’t redeemed, you can now use their voucher for someone else.

On the other hand, if you are focusing on brand building and are willing to forgo the short-term profit for long-term customer loyalty, nudge customers toward redeeming, so that they can indeed build that positive association of their experience with you.

Whichever route you choose to take, industrywide breakage rates are around 30% and, even if you nudge people toward redeeming, are unlikely to drop below 5%, so make sure you are including this in your calculations.

See also: It’s All About the Customer Journey

And the results?

Our clients experience an average 15% reduction in customer churn by offering personalized gift cards to their customers.

For more on how to boost loyalty and retention among subscription customers, read our brand-new ebook, “The Ultimate Guide to Loyalty and Retention.”

The key message is: Stand out. Provide an experience. Do what others don’t. Give the customer a positive feeling for staying with you, even if you are not the cheapest option on the market.

Here’s to the end of the first-year itch!

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About the Author

William Roberts is the co-founder and director of marketing and product at Loyalty Bay, a pioneer in subscription customer retention solutions.

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