Tag Archives: cpa

Lowering Costs of Customer Acquisition

Customer acquisition costs are a familiar problem throughout the business world. On average, businesses spend five times more to acquire a new customer than to keep an existing customer, according to Khalid Saleh at Invesp. Companies focus more attention on acquisition than retention, too: About 44% dedicate themselves to acquisition, while only 18% focus on retention.

For insurers, customer acquisition is even pricier. “The insurance industry has the highest customer acquisition costs of any industry. It costs seven to nine times more for an insurance agency to attract a new customer than to retain one,” says Lynn Thomas, president of 21st Century Management Consulting.

While customer retention strongly affects insurers’ bottom lines, new customers are essential to maintain a steady pace of growth and build a competitive edge. Controlling costs while still attracting new customers presents a challenge for insurance companies.

How Expensive Are New Insurance Customers?

When you compare the high price of customer acquisition with the low net margin of property and casualty insurance — which hovers between 3% and 8%, according to Mary Hall at Investopedia — It’s easy to see why acquisition costs are a concern.

Direct insurers have had an advantage in this area for quite some time. As early as 2014, William Blair & Co. analyst Adam Klauber determined that direct insurers like Progressive and Geico paid an average of $487 to acquire a customer. Meanwhile, captive insurers like State Farm and Allstate paid $792 on average.

See also: Who Is Your Customer; How Is the Experience?  

When independent agents were added to the mix, Klauber said, the average cost of customer acquisition rose to $900 per customer.

One reason new customer costs are so high in insurance is that the industry has lagged in adopting digital technologies that meet the expectations of today’s insurance shoppers, say Tanguy Catlin and fellow researchers at McKinsey.

Customers want simplicity, 24/7 availability and quick delivery. They also demand clarity about pricing, value and services designed for the digital age, no matter what they’re shopping for. “They have the same expectations whatever the service provider, insurers included,” according to Catlin et al.

Improving technologies also helps transform customers’ perception of insurance as an outdated, unapproachable industry to one that is personalized and consistently present. When insurance is easier to access, customers are more likely to see it as a valuable and important facet of their lives.

KPIs in Customer Acquisition

It’s important to differentiate between customer acquisition cost (CAC) and cost per acquisition (CPA). While they sound similar at the outset, Proof’s Drew Housman outlines the difference: “CPA measures the cost of an action, CAC measures the cost of acquiring a customer.”

For example, if you want to measure the effectiveness of clicks on a digital ad or buy button, use CPA. To factor in every click a customer makes on the way to completing the transaction, use CAC.

Tracking both CPA and CAC is important, however, because not all methods of acquiring new customers yield results in the same period, says Gordon Donnelly at WordStream. For instance, combining SEO and content marketing with Google and Facebook advertising results may make insurers think their SEO is overperforming while their advertising is underperforming. This is because SEO and content marketing “typically take longer to yield results,” Donnelly says.

While a good customer acquisition cost varies by the type of insurer, one way to track CAC effectively is to balance it against customer lifetime value (CLV), Jordan Ehrlich at DemandJump says. Customers who offer a higher lifetime value may be worth more to acquire at the outset.

Ideally, the ratio between CLV and CAC will always show a higher number for the former metric: A customer’s overall value will always be higher than the cost to acquire the customer. “The less it costs you to acquire a single customer and the more overall value that customer represents, the more profit you stand to make,” Donnelly says.

Treating customer acquisition, retention and value as three facets of the same goal can improve insurers’ ability to attract, retain and profit from customer relationships. “Since new policyholders immediately become current policyholders, your improved customer experience increases the likelihood that they will stay with your company, refer you to others and so on,” Patricia Moore at One Inc. says.

How to Lower Costs Without Losing New Customers

Cutting customer acquisition costs won’t help an insurance company if it also results in fewer new customers. Fortunately, there are several effective methods for reducing these costs while improving the quality of new customer relationships.

1. Use Incidental Channels

Incidental channels are products or services that deliver value separately from insurance but that build a customer relationship and gather data that ultimately support an insurance relationship, says Kyle Nakatsuji, principal at American Family Ventures.

These channels can help lower customer acquisition costs and improve engagement by demonstrating value to customers early in the process. Customers are more amenable to an eventual insurance purchase because they’ve already received value from the service and have perhaps considered how insurance could further improve that value. These services can also perform data-collecting functions, making it even simpler for new customers to choose and purchase coverage, Nakatsuji says.

2. Leverage Retention by Seeking Referrals

An added benefit of incidental channels is that they make it easier for your current customers to recommend your insurance services to potential new customers, says Srikumar Rao, author of Happiness at Work.

For example, imagine an app that helps homeowners identify and mitigate the most common causes of household fires. When a loyal customer uses the app, benefits from it and recommends it to others, that customer “is no longer a supplicant when she draws the attention of her contacts to you. She is the enthusiastic and proud bearer of a gift. She has bounty that she will bestow on the deserving,” Rao says.

Not only have you made it easier for your loyal customers to refer their associates to your company, you’ve made it gratifying to them to do so.

3. Recognize Why Loyal Customers’ Referrals Matter

Customer retention has a profound effect on the bottom line. When customer retention increases by only 5%, profits increase by 25% to 95%, according to research by Frederick Reichheld at Bain & Co.

Nurturing relationships with existing customers builds trust, allowing companies to offer additional products and services with a lower chance of rejection, startup adviser Yoav Vilner says. It also increases the chance of attracting new customers through referrals — by far one of the least expensive methods of customer acquisition.

Referrals, or word of mouth, account for 20% to 50% of all purchasing decisions, say Jacques Bughin, Jonathan Doogan and Ole Jørgen Vetvik at McKinsey. Experiential word of mouth, in which existing customers share their own firsthand experiences with a product or service, is perhaps the most powerful. It’s also the most common: 50% to 80% of word-of-mouth marketing is based on a consumer’s personal experiences.

Loyal customers are more likely to speak highly of their insurance company when services exceed their expectations, according to Bughin and fellow researchers. As a result, insurance companies that underpromise and overdeliver stand a better chance of generating praise and referrals from their existing customer base.

When should insurance companies ask for referrals? Sooner is better, says Eric Wlison, national account director at Kaplan. Waiting until a customer’s transaction is finished increases the chances that something might go wrong, spoiling the customer’s inclination to speak positively of the insurance company to friends and family.

“Remember that it is human nature to want to help others succeed. If you don’t ask for referrals you’ll likely get zero, and if you ask and get zero you are still at the same spot as if you hadn’t asked,” Wilson says.

4. Embrace Digital Tools That Promote Loyalty

Here is where customer loyalty and technology intersect to drive down the costs of acquiring new customers.

Nearly every consumer-facing industry has grappled with how to meet evolving customer expectations. Any fast food restaurant will offer bundled meals as well as a la carte menu items from which customers can choose. Even change-averse airlines and cable providers have learned to offer customizable levels of service because that’s what their customers have demanded.

See also: The Missing Piece for Customer Experience  

This is the point the team at McKinsey is making when they say insurance customers want simplicity and quick delivery. Today’s customers want to be able to choose from any and all available product lines, regardless of which carriers provide them.

This is what the BOLT Platform facilitates. Our users are able to offer and sell their own products alongside bundled products from other carriers because, ultimately, customers only care about getting the coverage they need. The best way to meet this need is to become a one-stop-shop for your customers.

Insurance companies that embrace this will earn increasing customer loyalty. And, as new potential customers come forward, it will require less time, less money and less effort to convince them to buy.

Thinking on Core Systems Is Backward

Insurance technology spending is high. In April 2015, Celent estimated that global insurance technology spending would top $181.6 billion by the end of 2016. This spending will include a combination of standard modernization, keeping legacy systems alive and well, supporting infrastructure projects and (increasingly) building digital and data frameworks.

Many insurers remain focused on upgrading or maintaining their core systems. The common internal debate is whether the insurer should maintain the legacy system or start over by adopting a modern solution. This debate almost completely ignores the proper approach to determining the answers to technology decisions, placing the cart squarely ahead of the horse. If one accepts the basic premise that core new business, policy, claims and billing management systems are really just table stakes, why not focus on the business — improving growth, increasing market penetration and improving both the combined ratio and profitability?

If we do this, we are likely to achieve all of these things AND construct a technology framework that fits now and is flexible for the future. For the sake of conversation, I have come up with three areas where business focus will lead to the right kind of modernization and transformation.

The first two are concrete business goals: reduce the cost per acquisition (CPA) and increase customer retention. The third is less concrete and more philosophical: embrace change by improving an understanding of the opportunities it may provide.

Reduce Cost Per Acquisition

The CPA is the largest cost in the current insurance business model (outside of claims). It is currently under pressure because of the rise in aggregators and comparison sites that are forcing insurers to sell standardized products for the least amount they can. The result is a market designed to churn because of a continual focus on price.

See also: 4 Benefits From Data Centralization  

How can insurers break out of this cycle, reduce the cost per acquisition and use the savings to remain competitive? Here are a few ideas:

  • Insurers should consider a cloud solution for core systems/back-office administration. U.K. insurers have, unfortunately, been slow to adopt shared services and technologies when they are proving themselves in other industries and geographies. Now is the time to consider cloud solutions if they fit with cost reduction objectives and if they can sustain or improve service levels.
  • The industry should use a permission-based consumer data storehouse. Churning policyholders benefits no one and costs all of us a great deal of time and effort. What is needed is a true permission-based marketing model, where consumers grasp the benefit of letting insurers see relevant profile information. This would enable the direct-to-consumer or small-business framework where insurers would provide a digital front-end that “pre-fills” the quote with existing data on the customer or other third party data, streamlining the process. It would also enable insurers to better match tailored products to prospects, instead of having to offer standardized products.
  • Insurers should hone data-driven target marketing. Today’s data sources and analytics allow for much more granularity and fine-tuning in the marketing process. With the right tools, insurers can now use consumer-provided data and detailed third party data to provide qualified offers to only those consumers and small businesses that fit a certain product’s risk profile. This would reduce CPA and improve risk selection.

Increase Customer Retention

With a high cost per acquisition, customer retention becomes an increasingly critical metric for insurers, particularly because initial acquisition costs are recouped over multiple years. The increasingly price-sensitive market has reduced the number of multi-year policyholders. Industry studies have shown a clear correlation between a customer having multiple policies with a single insurer and their retention rate. Yet with the exception of multi-car policies, there has been little effort in creating an overarching combined personal lines product with auto, homeowners put forward by U.K. general insurers. This is in stark contrast to insurers in the U.S. market that have been focusing on the customer relationship with a goal of a multi-policy environment and customer retention business processes.

Most U.K. insurers’ core insurance systems are legacy systems built around the product, not the customer. Realigning technology choices, process reengineering and customer-centric product development will result in the ability to offer multi-risk and multi-year policies (and discounts) and preventive risk management services. These will help to build loyalty and retention.

Embrace Change and New Ideas

Technology is enabling exciting changes in insurance. Whether it is innovative new products, new customer relationship business models, implementing modern core insurance solutions, leveraging new data sources or embracing new technologies — each offers an opportunity to begin the journey to a new future that is rapidly unfolding in the industry.

New technologies will give insurers improved data, better analytics and lower transactional costs through self-service. Consumers will benefit with services closer to an “Amazon experience” with a greater level of insurance understanding.

See also: How Technology Breaks Down Silos

To capitalize on the opportunities presented right now, insurers must embrace new ideas and change before new entrants do so and disrupt the industry. Insurtech is the conceptual umbrella containing insurance ideas and technologies that are rewriting the rules of insurance and helping insurers succeed. Internal education on the highlights of today’s insurtech landscape may be an excellent catalyst for change within your organization.

Preparing for change should still include conversations about the core insurance solution. The core can serve as a catalyst for change instead of an inhibitor to market potential. Discussing even a small part, such as the financial benefits of core change, can fuel both creativity and a desire to create and capitalize on a new model. Nothing will pull leadership together faster than a plan for real growth and solid change where efforts are directly tied to outcomes. Those are healthy approaches to core conversations.

So where do we begin?

To begin, focus on business priorities. If you do this, your organization will end up with the right technology solutions and a core system that fits and supports the business. You’ll make technology investments, not expenditures. Your costs will be lower. Your customers will be more loyal. You’ll recruit better businesses. And you will keep the horse in front of the cart, enjoying the way systems and processes and people work in unity to accomplish goals.

Blockchain: No More Double-Entry Books?

My day job at Ribbit.me keeps me insanely busy. Too busy, unfortunately, to spend enough time thinking about one of the more exciting and disruptive impacts of blockchain technology: the breakdown of double-entry bookkeeping. In a previous life, I was a CPA, and I’ve been wanting to put some thoughts out there for a while. I still see very few people talking about the effect on blockchain on bookkeeping despite its potentially bringing into doubt the effectiveness of the most fundamental foundation of commerce today. 

Tried and True Double-Entry Bookkeeping

Double-entry bookkeeping is the basic foundation of how we account for value today. For 2,000 years it has served as an unquestionable given in commerce. There are two columns, the debit column and the credit column. There are two entries — the first entry is to record what you have, and the second entry is to record how you got it (e.g. debit cash and credit sales). If these aren’t equal, we know counterparty exposure has not been properly accounted for, prompting an audit and a correction. It mandates the accounting of counterparty exposure for every single movement of value. It is a beautiful system in its simplicity and effectiveness.

See Also: What’s In Store for Blockchain

But, what happens if the counterparty exposure is not known? What if we don’t know who owns, or is liable for, the value of assets recorded on a ledger? In the old paradigm, this was simply an impossibility. Counterparty claims to assets were always known, because, to receive or send an asset of value, it must be received by or sent to a counterparty! It seems so basic and fundamental, someone would think this could never be questioned. Until now.

Permissionless and Permissioned Blockchains

Enter blockchain. A blockchain is a single-entry bookkeeping ecosystem. Well, technically a permissionless blockchain is a single-entry bookkeeping ecosystem. A permissionless blockchain is an ecosystem where, obviously, permission is not required to participate.

On the other hand, there is the permissioned blockchain. My company Ribbit.me uses a permissioned ledger as its platform. In the permissioned blockchain ecosystem, permission is required for a user to participate. The degree of permission can vary from ecosystem to ecosystem. Permissioned blockchains have come about to facilitate enterprise adoption of blockchain technology. If you want to know why, it’s all about counterparty risk.

A pure permissionless blockchain ecosystem is a type of distributed autonomous organization (DAO). In a DAO, there is no central authority running the show. Control is decentralized across anonymous users in the distributed network, and anyone can participate as a user. The blockchain does not know or care who the users are. It introduces the real potential for true universal and global financial inclusion.

This is great! But, wait, the road to utopia isn’t that simple. An ecosystem of anonymous users means transactions with counterparties of unknown identity. In other words, it means we no longer know the identity of who has ownership of or who has creditor claims to the assets on the ledger.

Double-Entry Bookkeeping in Legacy Banking

When we deposit money into a bank account, we are transferring value to the bank as custodian of our asset. We still own the asset in our account and, at some point, the bank is required to return the asset to us. On the bank’s ledger, this transaction will result in a debit to cash, an asset account on the left hand side of the ledger and a credit to demand deposits (a liability account on the right hand side of the ledger). Easy-peasy double-entry bookkeeping! 

Single-Entry Bookkeeping in a Permissionless Blockchain

When a user acquires access to (not ownership of — keep reading to know why) a permissionless blockchain native token, it is effectively doing the same thing as what was described above. It is transferring or depositing value into a ledger wallet. In this case, the bank is replaced with network nodes performing as custodians of a distributed ledger. The depositor and the custodians can also be anonymous. On the permissionless-blockchain-distributed ledger, this transaction is recorded as a debit to the user’s wallet, an asset account on the left side of the ledger and a credit to… what?

To answer that question, we need to figure out who is actually liable for the distributed ledger. Well, the network nodes should be, as they are our custodians of the ledger and, therefore, of the value contained within it. Furthermore, since every network node is of equal importance and authority, in theory, every node should equally share the custodianship liability of the assets recorded in the left hand column of the ledger.

Anonymous Counterparties

We have two problems here. In this ecosystem, both the users and the network nodes are anonymous. And because it is a DAO, there is no centralized owner/operator of the ledger to approach for access to network node identities.

The Introduction of Single-Entry Bookkeeping

Because the user’s network node counterparty is anonymous, it is impossible to record it as the entity liable for the asset. A search for ledger ownership in the form of a capital account will not be any more fruitful. Remember, this ledger is a DAO. By definition, no single entity owns or operates it. And, just like that, with nobody to attribute liability to and nobody to attribute ownership to, the right hand-side of the credit column disappears. Double-entry bookkeeping collapses. What is left behind is a single-column ledger in a single-entry bookkeeping ecosystem.

I omitted one part of the bank-deposit example out of this blockchain example: “We still own the asset in our account, and, at some point, the bank is required to return the asset to us.” This was omitted because there is a possibility that the user can never really own value embodied as a blockchain native token. First, the user’s identity may be anonymous. Second, even if the user chooses to reveal its identity, the value it claims ownership of always resides within the blockchain ledger. It is literally impossible to have physical possession of the value. To do so would require a counterparty to request the returning of the user’s value to it.

Paradoxically, the deeper one’s understanding of double-entry bookkeeping, the more difficult it may be to understand all of this. More than once, I’ve spent more than an hour trying explain this to university accounting professors and professional-practicing CPAs. They are so close to double-entry bookkeeping that asking them to question it is something akin to asking a physicist to question gravity. It’s like they say: Don’t try this at home, kids!

Entirely New Challenges and Risks

Cognitive dissonance aside, blockchain has introduced a new age of single-entry bookkeeping. This has opened a Pandora’s box of entirely new challenges and risks that are brought about by undefinable asset ownership/liability and unquantifiable counterparty risk. These are not just new challenges and risks for the transaction counterparties but for the regulators mandated to oversee it all.

See Also: What Is and What Isn’t a Blockchain?

Challenges for Enterprise Adoption

If the user is an individual, as sole proprietor of its person, it can make decisions regarding risk exposure on its own behalf. But can a corporate director? Can a corporate director authorize the use of shareholder capital for an anonymous counterparty transaction in a single-entry ledger ecosystem without violating its fiduciary duty to those shareholders? Can a regulator determine (with confidence) that a regulated entity in the same transaction is not in violation of KYC/AML or anti-terrorism financing laws? These are very important questions that have yet to be answered and that risk managers must demand answers to.

Entirely New Accounting Standards Are Needed

Once considered the boring bedrock of commerce, accounting as a discipline is now entering an era of uncertainty at the most fundamental level. This will force us to redefine how value is accounted for. This brings new opportunities — as we will soon see, single-entry bookkeeping will emerge as a new discipline of study and research.

There will be a real market need to innovate standards that allow us to account for value in the new paradigm. This probably terrifies the accountants out there. But in reality it is good, as it is human innovation itself that is true source of wealth creation.

If I have sparked an interest, feel free to reach out! You may very well be a pencil-pushing geek just like me.

How to Think About Marijuana and Work

With a flip of the calendar, on July 1, Oregon became the fourth state in which recreational marijuana use became legal. For many Oregon employers, this status change from illegal to legal wasn’t a big deal. Medical marijuana is already legal in 24 states, including the Beaver State, and possessing less than an ounce was decriminalized in Oregon 40 years ago.

Recreational marijuana is just a new twist on an old story. All it really means is you can’t go to jail (or be fined) for smoking pot recreationally.

However, this “non-event” has made risk managers ponder the ramifications of recreational use, especially for their employees who work in the manufacturing industry. Manufacturers have strict policies to ensure a safe work environment. It goes without saying that people who are under the influence at work in a manufacturing or an industrial setting are far more likely to be injured on the job.

Being stoned at work should be treated no differently than being under the influence of alcohol or prescription medication. You certainly can’t show up drunk for work.

The employer is responsible for that employee as soon as he walks on to the job. Any drug use that affects an employee’s ability to perform the job should be a genuine concern for the employer.

The difficulty for employers is that there is no scientific method to determine a marijuana intoxication level, unlike a blood-alcohol level. Until there is definitive scientific evidence, employers are being advised to err on side of safety and forbid an employee to be under the influence of marijuana.

To do that, the employer needs a crystal-clear, zero-tolerance policy. Unless the employer has been living in a cave the past 50 years, it already has such a policy. But it should be updated to specifically address marijuana use, both on the job and recreationally, because it could affect the employee’s job performance.

It is predicted that in 2016 – the third election cycle in which marijuana legalization measures will be on ballots across the country – as many as seven more states could allow recreational use of marijuana. As each state approves the recreational use of marijuana, there looms in the background the knowledge, that under federal law, its use remains illegal.

Whether that will eventually force the feds to take a stand remains to be seen. Right now, the feds have just rolled over to let you scratch their belly.

But as each state joins the ranks of approving pot use recreationally, what was a minor irritant to the feds could grow too large for them to ignore.

The bottom line is that a stoned CPA might drop a number or two, but a stoned assembly line worker might drop a few fingers. It doesn’t matter if the cause is pot, alcohol or prescription medication. Smoke cannabis at work – or show up stoned – and you’ll be disciplined. It’s not about a worker’s rights; it’s about workplace safety.

How to Evaluate the External Auditors

The Audit Committee Collaboration (six associations or firms, including the National Association of Corporate Directors and NYSE Governance Services) recently published External Auditor Assessment Tool: A Reference for Audit Committees Worldwide.

It’s a good product, useful for audit committees and those who advise them — especially chief audit executives (CAEs), CFOs and general counsel.

The tool includes an overview of the topic, a discussion of important areas to assess (with sample questions for each) and a sample questionnaire to ask management to complete.

However, the document does not talk about the critical need for the audit committee to exercise professional skepticism and ask penetrating questions to test the external audit team’s quality.

Given the publicized failures of audit firms to detect serious issues (fortunately few, but still too many – the latest being the FIFA scandal) and the deficiencies continually found by the PCAOB Examiners, audit committees must take this matter seriously.

Let me Illustrate with a story. Some years ago, I joined a global manufacturing company as the head of the internal audit function, with responsibility for the SOX program. I was the first to hold that position; previously, the internal audit function had been outsourced. Within a couple of months, I attended my first audit committee meeting. I said there was an internal control issue that, if not addressed by year-end, might be considered a material weakness in the system of internal control over financial reporting. None of the corporate financial reporting team was a CPA! That included the CFO, the corporate controller and the entire financial reporting team. I said that, apart from the Asia-Pacific team in Singapore, the only CPAs on staff were me, the treasurer and a business unit controller. The deficiency was that, as a result, the financial reporting team relied heavily on the external auditors for technical accounting advice – and this was no longer permitted.

The chairman of the audit committee turned to the CFO, asked him if that was correct and received an (unapologetic) affirmative. The chairman then turned to the audit partner, seated directly to his right, and asked if he knew about this situation. The partner also gave an unapologetic “yes” in reply.

The chairman then asked the CEO (incidentally, the former CFO, whose policy it had been not to hire CPAs) to have the issue addressed promptly, which it was.

However, the audit committee totally let the audit partner off the hook. The audit firm had never reported this as an issue to the audit committee, even though it had been in place for several years. The chairman did not ask the audit partner why; whether he agreed with my assessment of the issue; why the firm had not identified this as a material weakness or significant deficiency in prior years; or any other related question.

If you talk to those in management who work with the external audit team, the most frequent complaint is that the auditors don’t use judgment and common sense. They worry about the trivial rather than what is important and potentially material to the financial statements. In addition, they often are unreasonable and unwilling to work with management – going overboard to preserve the appearance of independence.

I addressed this in a prior post, when I said the audit committee should consider:

  • Whether the external auditor has adopted an appropriate attitude for working with the company, including management and the internal auditor
  • Whether the auditor has taken a top-down and risk-based approach that focuses on what matters and not on trivia, minimizing both cost and disruption, and
  • Whether issues are addressed with common sense rather than a desire to prove themselves

Does your audit committee perform an appropriate review and assessment of the external audit firm and their performance?

I welcome your comments.