I’m sure you have all heard the old folk warning of the frog in boiling water. Put a frog into a pot of cold water, turn up the heat, and the frog will sit there until he becomes frog soup, not sensing the severity of his situation until it’s too late to take action. However, throw that same frog into a pot of water that’s already boiling and he will somehow get out before his feet hit the bottom of the pot, the seriousness of the situation being painfully obvious.
Well, in many ways, you are likely in a pot of very warm water yourself—financially speaking anyway. Regardless of how aware you may or may not be, the pot of water that is your revenue stream is starting to boil.
100 Degrees – Health care reform is passed, which includes something called the “MLR.” As a result, in many markets, carriers cut commissions. The heat turns up a bit.
120 Degrees - On the P&C side, you see year after year of soft markets. Your compensation drops just as fast as the premiums. And it gets a little hotter.
150 Degrees - The recession hits your clients. They reduce head counts and payroll. Whether you are on the P&C side or benefits, premiums and (you guessed it) your commissions are reduced as well. And the water becomes even more uncomfortable.
175 Degrees - The same financial hard times are hitting the bottom line of your clients and they have to eliminate certain benefits. No benefits, no commissions, but a lot more heat.
200 Degrees - Your competition is feeling the heat as well and out of desperation tries to steal your accounts by offering to work for less than you. Your response is likely to cut the compensation even further. Now you’re turning the heat up on yourself!
(And, in case you forgot, water boils at 212.)
At this point, for many, the only saving grace is the fact that the financial reward for mediocrity in our industry has been way too high. I’m not suggesting you are mediocre at what you do, but I am suggesting that we have tolerated the higher heat because there was so much excess “insulation” to begin with.
I’m also not suggesting that you haven’t recognized the increased heat. However, because the heat has been turned up gradually, I’m going to guess that your reactions have also been incremental, at best. Cross sell, prospect a little more, sell voluntary, etc.
My suggestion is to assume that the water is at a full boil and get yourself out of the pot now. Getting out means taking control of the heat, which means taking control of how you get paid.
Yes, there are many elements beyond your control, but it has become inexcusable to allow the carriers to control your revenue and tell you how much you are worth. As in any business, you need to be setting your own prices. This means moving from commissions to fees.
I understand that this is easier said than done, but it is extremely doable. The key is to just get started.
Start by having a conversation (today) with each of your clients about how much you are getting paid through commissions and what value you deliver to them in return.
Explain you are moving to a fee structure to ensure they will always know exactly what you are being paid and the value they are receiving in return.
Of course, you need to know how to set those fees once you make this change.
It starts with analyzing how much it takes you to service an account.
- What are your fixed costs that need to be allocated across your entire book?
- How much service time (account managers, account executives, wellness coordinators, HR), and at what billable hour, will this account require?
- How much administrative time, and at what billable hour, will be required?
- What variable costs will be incurred on behalf of this account?
- How much does the producer need to earn on this account?
- How much does the agency need to earn on this account?
No, it isn’t necessarily easy, but then neither is climbing out of the pot once you have become the main course. You just have to ask yourself, “How badly do I want out?”
Photo by Purple Slog.