Beware The Pitfalls Of Cross-Selling
We all know how valuable cross-selling is to independent agencies. Numbers I have read suggest profit margins on the second sale are two-to-three times higher than the first sale and retention is 60 percent higher. Yet the average number of policies per customer has not changed in independent agencies in 20 years.
How can something so important, something preached constantly for year upon year, be so elusive? The truth is that cross-selling is a complicated process and it fails for many logical reasons.
One reason is that too many producers sell price. When an agent or broker sells price, they build fear into their own psyche–they fear someone else will offer a better price. Add to this the fact that, to most people, the loss of a dollar is psychologically twice as valuable as the gain of a dollar.
Therefore, because so many producers sell price, they are constantly worried they will lose clients (dollars) to other agencies, and because they value these potentially lost dollars twice as much as any potential gains, they spend all their time worrying about how not to lose sales rather than how to make more sales.
The fear of losing dollars counteracts cross-selling because once a producer makes one sale, they do not want any contact with a client that might cost them that sale. This includes trying to sell additional products because the client might perceive the producer as being greedy by trying to sell them more insurance than they need.
I think this is a key reason so very few producers offer employment practices liability insurance even though virtually every commercial client needs it and, from an errors and omissions perspective, producers should offer it to every commercial client.
However, it is a relatively new product that most clients have probably never been offered, so offering it might cast suspicion on the producer. Consequently, the producer does not offer it. Better to be happy with half a loaf than no bread at all, and so goes an excellent cross-sell opportunity.
Another reason producers do not cross-sell is that the more policies a client buys, the more likely clients are to have something go wrong. When I worked for an insurance company, many commercial marketing reps would not even mention the company's personal lines products to their agents for this very reason.
Our personal lines division did not have high error rates, but a personal lines policy that went bad for an important commercial account could jeopardize the bigger commercial account. (For example, the businessowner's son is arrested for driving while intoxicated, yet the businessowner does not understand why the insurer is canceling his son's auto insurance.) One division can cost another division a sale even more easily than one division can cross-sell another division.
Therefore a key criteria to successful cross-selling is that the first division (if divisions or departments are involved) must have confidence that the second division will provide great service, products and reasonable prices.
Because most independent agencies focus either on commercial or personal lines (along with a few that have producers that focus on health and life insurance), their energy and efforts are focused on one or the other. The secondary product/division gets the scraps.
For example, if a client already has a commercial policy and the agency is trying to sell them a health policy, the commercial producer must have complete confidence in the health insurance department.
Similarly, when different departments are not involved, a producer might know one product but lacks confidence and knowledge in others, so does not sell those. If a producer does not know a product, they should not sell it. So this is a smart strategy, but another reason why cross-selling fails.
Big egos can often be a useful characteristic for selling, but a death sentence for cross-selling. A problem arises when a producer believes, "I'm better than anyone else, so anyone else is going to do a lesser job selling the next product, which will increase the risk of something getting messed up." And so goes another lost cross-sell opportunity.
Another reason cross-selling is not more successful is that producers have a tendency to cross-sell all customers equally. In other words, all homeowners customers are approached with an offer to sell them auto insurance. However, not all customers are fit for a cross-sell, so our failure rate is higher than we believe it should be.
An even more rigorous qualification of the account should occur before the second sale is made. In fact, in my business, I often intentionally fail to mention additional services I provide to some clients because I do not feel they would make good candidates for my other services.
In essence, these reasons speak to what a leading insurance company CEO said regarding cross-selling bank products with insurance products two years ago. To paraphrase, he said that to base mergers and acquisitions on the great potential for cross-selling is to assume the combined company will offer the best products on both sides. If not, producers will not sell both products and customers will not want to buy both products. To be better than the competition in one area is tough enough. Being good in multiple areas is very difficult.
Successfully cross-selling will dramatically increase profits because, as mentioned, profit margins on the second sale are two to three times higher than the first sale and retention is 60 percent higher. But, as Adam Smith proved in "Wealth of Nations," written in 1776, a nation (this applies equally to a company) that is better than all others in two areas, will still make more money if it only focuses on the product it builds best and lets someone else produce the second product.
Similarly, it is often more beneficial for customers to buy from multiple parties. Cross-selling is rarely as successful as producers expect because not all clients will buy from one agency even if your products, service and prices are better than any other competitor's.
Buyers want to spread their business for emotional and logical reasons. Emotionally, they feel more secure doing business with multiple parties. Logically, keeping two agents involved may keep both working harder for the client. In addition, as with investments, spreading business diversifies the risk of something going drastically wrong with an agency.
Without a doubt, successful cross-selling is very, very profitable but also very, very difficult. Cross-selling is so problematic that focusing on what we do best and not cross-selling is often more profitable and easier than cross-selling, no matter the benefits.
After all, if a cross-selling effort fails–which most do–are profits any higher? What if all the time and money spent on the cross-selling program was used to sell what the agency does best?
Before embarking on a costly (in time and money) cross-selling program, make sure you have bridges that cross all the pitfalls that accompany cross-selling. If you have bridged those chasms–having the best products and services in all areas, having good pricing in all areas, having expertise in all areas, and you can execute the plan–mountains of profits await your agency.
Chris Burand is president of Burand & Associates, LLC, a consulting firm for independent agencies based in Pueblo, Colo. He can be e-mailed at chris@burand-associates.com.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 17, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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