Across industries, it’s generally accepted that it costs about five times as much to attract a new customer as it does to sell to an existing one. In insurance, the cost of acquiring customers (CAC) is higher, at seven to nine times that of selling to an existing customer. On average, that’s paying between $487 and $900 for each new customer.
These costs are higher partly from the prevalent acquisition methods many carriers still depend on. TV ads, one method commonly used, cost insurers hundreds of millions of dollars annually. Branch locations are another large cost: insurance branches are no less commonplace than fast food joints. But while customers throng restaurants daily, they only occasionally stop by to browse for insurance policies.
Relying on traditional acquisition methods is an expensive proposition. It makes players vulnerable to disruption by those that acquire customers more efficiently. Solving the customer acquisition puzzle pays huge dividends, for disruptors in most industries.
While incumbents are threatened by newer approaches to optimize CAC, digital natives too struggle in their initiatives. Consider Root Insurance, which has had its share of trouble in the last few months. It lost more than $415 million in the first three quarters of 2021, almost double the same period a year ago. To recover lost ground, the Ohio based digital auto insurer is rolling out a marketing revamp program to rework its spend and pursue more cost-efficient distribution channels. The target is to reduce CAC and operating losses to improve full-year operating losses in 2022.
When you compare the high price of customer acquisition with the low net margin of P&C insurance — which ranges between 3%-8%— It’s easy to see why acquisition costs are a concern.
CACs tend to rise over time as a company migrates from the early majority to late majority adopters. This means that there are diminishing returns to acquiring customers. The upward trend in CACs holds equally for B2B and B2C companies.
Studies show that CACs are higher for fragmented industries with many players than for industries with few competitors. However, retention cost per customer remains relatively stable regardless of the number of players. Generally, CAC tends to rise over time since the early customers are the most enthusiastic and the more skeptical lot are converted later. CAC decreases for businesses that enjoy network effects, when the value of a service increases as more people join the bandwagon. For such businesses, spending on CAC increases till the business reaches a tipping point, post which incremental CAC declines sharply.
While a good CAC depends on the business line, one way to weigh this metric effectively is to balance it against customer lifetime value (CLV). Customers with higher CLV are worth more to acquire at the outset. A customer’s overall value should always be higher than the cost to acquire. The less it costs you to acquire a single customer and the more overall value that customer represents, the more profit one stands to make.
Direct insurers have had an edge in this area for quite some time. A few years back, direct insurers like Progressive and Geico paid an average of $487 to acquire a customer, while captive agent-based insurers like State Farm and Allstate paid $792 on average. With independent agents, this figure rose to $900 per customer.
Root had been using its so-called performance marketing channels for customer acquisition, which created significant cost increases and low returns. As it changes tack, customer acquisition costs are starting to decline, allowing Root to focus more on its partnerships. Its embedded insurance deal with Carvana is one to watch. It is also scaling up its internal sales agent program to reach customers that retain longer and at better unit economics.
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