When working to optimize your agency’s efficiency through technology and time management, it’s crucial not to forget about the financial aspect. As independent agencies, you have the flexibility of setting up your own financial model — you’re not dependent on the one set up by the company as captive agencies are. While it’s nice to have that independence, it also means you are directly responsible for setting up and adhering to that financial model. If it’s not successful, it’s time to recalculate.
What’s Your Agency’s Financial Model?
It’s crucial to look at where you currently are, and evaluate. How are you allocating your revenue to your various expenses? We’re talking about everything from rent and utilities to benefits paid out to employees. Are you following specific financial benchmarks like revenue per employee? Or are these expense categories allotted in terms of a percentage of total revenue? How do you ensure you’re continuing to generate a strong profit while setting aside funds for each of these expenses?
According to research done by the team at Agencybrokerage.com, independent insurance agencies generally follow one of two financial models based on that agency’s chosen method for generating new business. There’s either the marketing-driven model or the sales force-driven model. It’s pretty easy to identify which one your agency follows based on whether the owner is doing the legwork (via marketing) to make the phones ring or whether there’s a team of commission-based salespeople.
Which Financial Model is More Profitable?
While the marketing-driven model tends to be more profitable for independent agencies, it has limitations. It’s most common in personal lines P&C agencies and niched commercial lines P&C agencies that only serve small accounts. That said, agencies that choose the marketing-driven model may find they cannot exceed $2 million in revenue. So, it’s very profitable on a small scale. But if your philosophy is more along the lines of “go big or go home,” it’s worth looking at the sales force-driven model.
In an agency following the sales force-driven model, commission-based salespeople or a call center is responsible for reaching out to leads and closing the deal. A commission-based sales team is attractive because the agency only pays when a sale is made, keeping employee costs down. However, the overall cost of the sales with paid leads can be a lot higher than paying marketing costs. The most significant draw of this model is that an agency can grow larger and faster, making this model overall more efficient for building business.
But Can’t an Agency Do Both?
It is possible to take the best of each and create a blended marketing & sales driven model. Many agencies are taking advantage of adding a commission-based model on top of their overall marketing strategy. That can certainly work, as long as the owner(s) don’t lose track of their commission-based team while focusing on the marketing strategy. To make this blended model work, the owner will need to put specific production requirements in place and systemically check in on the producers to make sure they are indeed “producing.”
What Benchmarks Should Your Agency Follow?
While the Independence Insurance Agents & Brokers of America (IIABA) does together an annual Best Practices Gateway each year, it’s an average of the financial and operational data from agencies across the United States. The same goes for the National Alliance for Insurance Education & Research and their “Insurance Agency Growth & Performance Standards that comes out every two years. When you get an average of data, it can be difficult to pull out best practices for a specific agency or business model.
Instead, consider allocating sales and operations expenses based on whether your agency is marketing-driven, sales force-driven, or using a blended model. That means if you’re marketing-driven, you spend a little more on operating expenses but substantially less on sales expenses. If you’re sales force-driven, be prepared to spend 25 to 30% on commissions but a little less on wages and benefits. The full range of total expenses should be in the 48 to 66% range for marketing-driven, 64 to 86% for sales-driven, and 56 to 75% for blended.
Ultimately, the average net profitability will be 40 to 50% for marketing-driven, 25 to 35% for sales force-driven, and 30 to 40% for blended. Of course, that’s exclusive of the owner’s salary and benefits, depreciation, and interest on debt. For more details, see Merger & Acquisition Master Intermediary Michael Mensch’s presentation, “Best Practices for Growing an Insurance Agency.”