Does selling a $2,000 premium policy at a 10% commission earn you $200?

No. I’ll come back to this in a minute.

Last week, in The Smartest Metric You Aren’t Using, we talked about “Customer Acquisition Cost”. CAC basically tells you, “I’m spending X dollars to get a customer.”

By itself, CAC looks like something to reduce: “How can I spend less to get a customer?”

But that’s a weak game. How much you spend should depend on how much you get in return, right? You’d happily spend more to make a lot more.

In other words, you want to be able to say, “I’m spending X dollars to get Y dollars.”

But if you don’t understand the value of a sale, you’re stuck focusing on how to reduce CAC.

On average, the agents I talk with don’t know how much a sale is worth. Any “decision making” is based on things like:

• “It seems to be working.”
• “So-and-so says it’s working great.”
• “Hey, at least it’s something.”

And off they go to light money on fire.

So let’s step up from CAC and talk about the one metric to rule them all: Customer Lifetime Value (”CLV” or “Customer LTV”).

 

Money Times Time.

When I say that the average agent doesn’t know how much a sale is worth, I don’t mean they’re off by a little bit. I mean, they’re off by orders of magnitude.

Why?

Because they only look at up-front commissions. And as we learned last week, if they understood CAC, they would know they probably lost money out of the gate.

But let’s pretend there’s no CAC for a moment. That brings us back to this truth:

Selling a $2,000 premium policy at 10% commission DOES NOT earn you $200.

Why? Because you’re only looking at half of the equation. You’re in the recurring revenue business. You don’t make dollars.

You make dollars times years. It looks like this:

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|  Dollars
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Years

“Dollars” is your Y-axis. “Years” is your X-axis. If you only pay attention to your Y-axis, you’re not thinking strategically about your investments in sales, marketing, and retention.

(If you thought “Wait, isn’t the Y-axis ARR?” go to the front of the class.)

$2000 of premium at a 10% commission for 15 years is $3,000. That’s a $3,000 sale, not a $200 sale.

 

This Boils Down To Easy Math.

Here are two scenarios to illustrate my point:

Scenario 1: Customer buys 2 auto policies.

• Six-month premiums are $1,000 ($2,000 annually).
• Commission is 10%.
• Customer Acquisition Cost (CAC) is $250.
• Customer leaves after 3 years.

Total Sale Value = $2,000 times 10% times 3 years minus $250 = $350.

Scenario 2: Customer buys 2 auto policies. 3 years later they add a homeowners policy.

• Annual premiums go from $2,000 to $3,000
• Commission is 10%.
• Customer Acquisition Cost (CAC) is $250.
• Customer leaves after 10 years.

Total Sale Value = ($2,000 times 10% times 3 years) PLUS ($3,000 times 10% times 7 years) minus $250 = $2,450.

Scenario 2 is worth seven times as much as Scenario 1.

Agents who understand this and optimize for it make way more money and have happier, more loyal customers.

So here’s the million-dollar question: How much should you spend to make $350 versus $2,450? How about “the cost of meeting with the customer periodically to earn their loyalty and their additional business”?

 

Some Questions To Ask Yourself

Understanding CLV puts you in a position to think new, more strategic thoughts. You can begin to ask some questions that will help you develop a better go-to-market strategy.

Comparing the $350 and $2450 scenarios, ask yourself these questions:

• Would 7x revenue justify higher-quality leads?
• Would it justify spending 30 minutes with each customer periodically?
• Would it be better to focus on the quality of the conversation rather than the catchiness of the word track?
• Can you realign your salesforce around winning long-term clients instead of quick sales?
• Will you identify your Ideal Customer Profile and focus your marketing and advertising on them?

Or would you rather just do what everyone else seems to be doing and get their results? Because they’re getting the $350 results, not the $2450.