Organic growth depends on a number of factors—and most of them involve your sales force. According to a recent a study, a metric called “sales velocity” can shed light on your agency's producer hiring needs.
Your agency’s organic growth depends on a number of factors—and most of them involve your sales force.
While customer retention and new business production are both critically important to the equation, it’s tough to focus in on problem areas when so many variables are in play: rate, account losses, acquisitions and a variety of factors outside an agent’s control.
So what’s the best way to measure your agency’s customer retention alongside new business production in order to achieve maximum organic growth? “It’s important to break the two out separately in order to answer the question, ‘are you a sales organization?’” says Tom Doran, principal at Reagan Consulting.
According to a recent a Reagan Consulting study, “Producer Recruiting & Development: Getting the Attention It Deserves—and Achieving the Results You Need,” the solution to isolating the two factors is a metric called “sales velocity.” Expressed as a percentage, sales velocity is calculated by dividing this year’s total new business by the prior year’s total commissions and fees.
The bottom 25% of firms in the Reagan Value Index achieve a sales velocity of only 7.3% and the average firm achieves 12.7%, while the top 25% achieve 25%. Doran says the sales velocity metric answers the question: What is the agency’s new business contribution toward organic growth?
“If you want to focus on your sales engine, sales velocity is an excellent metric to eliminate the retention variable from the organic growth equation,” he explains. “Account retention is a service metric. Sales velocity enables you to really focus on just the new business piece and understand how you compare relative to other agencies.”
Doran explains that many agencies will say, “We want to grow 10% a year”—and that’s the end of the discussion. “What you haven’t done is ask, ‘How much new business would we need to do to accomplish that?’” he notes. “That’s where sales velocity helps.”
Consider the following example: an agency with a retention rate of 95% wants to grow 10% this year. That agency needs a sales velocity of 15% in order to achieve its goal. If a 15% sales velocity requires the agency to grow by $150,000, but the agency only has three producers who bring in about $30,000 of new business each year, “you have to figure out how you’re going to bridge that gap,” Doran says. “Where’s that other $60,000 going to come from?”
In that way, sales velocity becomes a planning tool for how many producers an agency should hire on an ongoing basis, identifying not only what the numbers should be but also gaps in an existing producer base. “You might say, let’s turn up the heat on our producers and get them to sell $40,000 this year instead of $30,000,” Doran says. “You’ve closed a little bit of that $60,000 gap, but it helps you understand it in a way that tells you whether or not you’ve really got enough producers to accomplish your goals.”
Using the sales velocity metric enables agencies to look at their existing producer team, factor in upcoming retirements and what Doran calls the “producer attrition number” to determine how many producers to hire each year in order to meet organic growth goals. “You might be one or two high or low,” Doran says. “But it gives a pretty good indication of what hiring needs are, given what we know our goals are and what we know our existing producer team is able to accomplish for us.”
Jacquelyn Connelly is IA senior editor.
