Target Market Strategy-Developing a Niche Market

Here is a pop quiz. Who is your target market? If you answered with a specific list of target markets take one step forward. If you said you are a generalist wait to the end of the article before you take one step forward.

Having a target or niche market does not mean that more than 50 percent of a business income must come from one narrow niche market. An exercise that we love to do with our clients is to have each producer run a list of accounts by SIC code. It is not unusual for those “generalists” to have one or two niche markets that account for 25 percent or more of total commissions each.

The reason for this is simple. Most new business comes from referrals. Referrals are more often than not from firms in the same industry or associated with that industry. Producers build up a reputation as well as a high comfort level due to knowing the jargon and unique needs of particular industries.

A niche or target market is a group of potential customers who share common characteristics making them especially receptive to customized products or service that a firm can offer. It is like a warm lead, so it usually makes sense to pursue it. The truth is all firms have a target market at some level. Those that believe they are generalists just have not looked closely enough. For example, most firms have a fairly steady mix of business, some ratio of commercial lines, personal lines, life, health, etc. Of course this ratio could be 100 percent commercial lines and 0 percent everything else. That firm clearly targets commercial lines. Upon a closer look, it might even have more specific targets within its book of business, such as contractors, printers and retail shops.

We typically see that 60 percent to 80 percent of revenue in an agency comes from five to 10 clearly distinct target markets. So why do owners and producers still call themselves generalists?

Why niche?
Target or niche marketing is usually associated with higher than average profit margins because of built in efficiencies. Selling the same product to the same type of client usually allows the staff to be much more productive compared to the typical agency. There is a built-in efficiency with taking the time to identify a target market and launching an effective sales campaign.

With target marketing, sales are rapid and it is a numbers game. The organization must be prepared to do quotes and handle lots of paperwork quickly. This type of firm is often highly profitable. Firms with only one niche market can easily topple if anything upsets it. If an agency sells only one product and that carrier closes down the program, the agency might also be closed. The target market can also be impacted by changes in regulations or other external forces (such as mold issues, natural disasters or consumer habit changes).

Agencies that sell multiple lines and have several “niche markets” are usually sturdy. The loss of any one product would hurt the firm, but it should survive. The profitability with this type of agency will vary based on the products sold and other factors. In general, they are not as profitable as agencies that focus on a single target market, but they still do well.

How to start?
Sit down with the producers and key staff for a brainstorming session. First, look at the local area—are there existing niches? Is the firm in a rural area with farms? Does the nearby industry hub focus on one industry such as high tech or furniture manufacturing? Is there a new upscale residential community? Is the firm near a recreational area, such as a lake or ski resort? Can the agency exploit these areas?

Next, look at the centers of influence for each producer. Perhaps one producer used to work in the trucking industry and still has connections. Maybe someone’s spouse is well known in real estate. Don’t overlook hobbies or outside activities. A producer who has a regular hobby already speaks the jargon and has a good feel for the unique needs associated with that pastime. That producer is also motivated by the subject matter of that target market.

Many agencies will benefit if they select several types of clients or industries and then sell them several types of products. This is a safe way to be a niche market player. It is also what many firms do without planning for it! But don’t stop there.

Target markets should not be too broad, such as “doctors” or “homeowners.” If so, producers are working harder and the firm is spending more money than necessary to promote new business. When an agency targets a broad audience, it is only targeting prospects who can use your product or service. The goal is to narrow the focus to target prospects who are likely to buy from the agency.

Refine a niche market
When refining the target market it is important to list the group’s unique needs and interests. It is also key that the group be large enough to produce the volume of business needed while being small enough so that competition might overlook it.

So, this means that the niche market should be “pediatricians” or “homeowners in region X with two cars and kids” instead of just “doctors” or “homeowners.” By refining the market, the agency can then refine the needs and unique characteristics of the market. It also helps streamline underwriting.

The agency then needs to make sure that it has the products that this group is seeking. Check with the various insurance companies to see who might offer a package policy for the selected target market. There is a good chance some carrier offers a customized program. The downside is that if large national or regional carriers offer this program, it is then often accessible by other agencies as well. See if the agency can get a regional exclusive for a company program.

To develop a truly unique program may require the agency to create its own program for the select target market. This can be done by using one type of risk coverage from company A and another policy from company B. Customizing coverages this way might take time, but it can be a great selling point for the target market. Often a niche has a unique need, such as pollution coverage or D&O, that is not adequately addressed in programs. A customize agency program demonstrates intimate knowledge of that target market.

Associations
Another great area for target marketing is industry/trade associations or affinity groups. These are ready-made target markets. Many of these groups are more than willing to enter into an agreement with vendors so that their members can have access to special deals for products and services, such as insurance.

In most cases, these types of arrangements can be profitable. But when they go bad, they go very bad. It is import to understand that any agreement with such groups will require give and take on both sides and it should be structured as a partnership. Take the time to do proper due diligence.

Often, there is a profit sharing arrangement and this can be a disincentive if too intrusive. Make sure the agency has at least a two-year commitment from the group. Otherwise, startup costs might not get paid off. Also, the agency needs to exploit group meetings and conventions as well as be promoted in the association’s newsletters.

One little trick if there is a target market without an association is to start your own association or affinity group. The agency will then have a captive audience! This could include business owners with the same ethnic background to a regular trade association.
How to market?

After the target group is identified then the next question is whether this group be contacted and properly developed in a profitable manner. The answers to the following questions should all be “yes” to ensure that this target market is a good idea to pursue:

Do the prospects in this group have a strong need or desire for the agency’s insurance products?

Will the insurance needs for these prospects create large enough premiums to make it a profitable book of business for an insurance company and the agency?

Can individual prospects within the group including their contact information be collected?

Can the sales staff deliver their message to these prospects under favorable circumstances (i.e., develop a relationship)?

Don’t waste time on this market if there is a “no” answer to any of these questions. It’s not a niche market for the agency.

Be sure to use the information developed in finding the target market to create the sales material for it. Build your advertising and sales material around the niche’s unique needs, the agency’s specialized understanding and unique benefits the agency can offer to this group. Hold seminars for the target market to gain credibility and reach new prospects.

It is much easier to plan an effective marketing strategy after an agency goes through the process of identifying a target market. By knowing the specific concerns of a niche market, the agency can tailor its message to focus on solutions to those concerns.

A final thought
It makes sense to have at least some target market business. It happens anyway, so embrace target marketing. The key is when the agency or producer systematically approaches target markets with the intent to sell, wonderful things happen.

So, do you still insist you are “generalists” or should you take one step forward?

Bill Schoeffler and Catherine Oak are partners in the international consulting firm, Oak & Associates. The firm specializes in financial and management consulting for independent insurance agents and brokers, including valuations, mergers and acquisitions, clusters, sales and marketing planning as well as perpetuation planning. They can be reached at (707) 936-6565, by e-mail at: bill@oakandassociates.com, or visit: www.oakandassociates.com.