As business owners we are always looking to bring on new clients and grow revenue. But is that the best strategy? We know that not all clients are created equal. Have you taken a critical eye to your client list to see if it’s time to sever some of your relationships?
I was recently working with a business owner who was frustrated with the amount of time he spent managing client relationships. This was preventing him from spending more time developing new business. As I was analyzing the client list, it became clear that the business fell into the 80/20 rule. 80% of the revenue was generated by 20% of the clients. Although the company had been in business for over 10 years and the owner was well known in the community, he was still running the firm as if it was just starting out. He felt obligated to accept any client that was willing to pay the fee.
The problem with this strategy is that it ignores the cost of managing each client relationship. For many high service businesses, small clients are expensive to maintain because the company can’t turn off its high level of client service. The result is that small clients receive the same level of attention from management as do bigger, more strategic clients.
This not only increases payroll costs but it overwhelms management and pulls them away from business development.
An exercise I perform with all of my clients is to prepare a client list that ranks clients by revenue and profit. This allows them to see not only concentration risk but also how much of the business comes from small accounts. In many instances, the loss of these clients will not have a big impact on revenue and will have an even smaller impact on profitability, and may even increase profits.
It is important for every business owner to have a good understanding of profitability by client. This allows the firm to focus its growth efforts on the right type of clients. In order to grow the business, and increase margins, it is important that the average profit per client increase. One way to increase profit per client is to eliminate those clients at the bottom of the list.
We all know these clients. They are the ones that are frequently calling to ask questions, complain about their bill and are late paying. They use much more of the firm’s administrative time than the bigger clients, who typically have a better sense of importance.
As we enter the slower summer months, it is a good time to review your client list and see what you can do to reduce the number of clients at the low end. This may mean referring them to another firm that is better suited to handle smaller clients. This has the added benefit of creating a relationship with these smaller firms that may refer larger clients.
If you would like to discuss this these concepts in relation to your situation, please contact me at 561-972-2423 or at barry@brickcfo.com
- Barry Brick