Customer acquisition costs vs. lifetime value of InsurTech customer:
This is one of the biggest challenges of the insurance industry includes balancing volume, profitability, and lifetime value of customer. It is important for new InsurTech companies to balance customer acquisition costs vs. lifetime value of InsurTech customers.
As an investor in InsurTech company, reinsurer, carrier, or competitor, it is important to understand customer acquisition costs (how to acquire customers cheap and effectively) plus the ability to select best in class risk (high lifetime value), this will be the biggest differentiation and productive value for industry.
The technology and customer experience are important but won’t drive the economics or change your trajectory.
Customer acquisition can be challenging given the large upfront costs to transition customers via strategies like social media advertising. It has taken some brands years to build trust long term (and minutes to lose it). In addition, the traditional distribution chain has embraced the use of social, print, in person, and other forms of ad mediums – driving up the cost to deliver the message.
This lifetime value of the customer issue isn’t limited to insurance, it is a challenge in other areas of FinTech, including passive asset management for example. However, the lifetime customer value is easier to determine in other financial services vs. insurance.
The lifetime value of the average InsurTech customer is also driven by a few things:
- Amount of products
- Profit margin in product
- Average duration customer stays with company
- Cost of goods sold to customer or Expected value (profit) of policy
For example, the ability to lose >$100k on an auto liability or > $1m on an umbrella loss would crush a small portfolio, but also make the expected lifetime value of a customer lower than other financial services or FinTech products (which are easier to model given the fees).
Determining the lifetime value of a customer that you sell personal auto insurance to, is different than someone you sell a bundle of products. You can spend more to acquire and retain customers that you have an auto and homeowners bundle. Due to the greater expected profit of a bundle.
Although InsurTech poses threats to existing distribution, the existing infrastructure can place non standard risks, access new customers for lower ad costs, have a mature portfolio, and offer a wide range of products.
The same can be said in the commercial insurance space, depth of products, capitalization, portfolio size, etc. all will be challenges for InsurTech platforms.
How long til advertising expenses increase on platforms like Facebook, Linkedin, Twitter, Instagram?
Does this change the economics of InsurTech platforms or any startups as customer acquisition costs increase vs. decreasing lifetime value of InsurTech customer – due to margin compression?
Is competition or startup’s probability of success in insurance limited due to Incumbent advantages?