Are Your Clients Holding You Back?

More clients don’t necessarily mean more profits. Find out how to shed the waste and produce profitable, and satisfied, customers.

By Allison Enright

ON THE SURFACE, EVERYTHING LOOKS OKAY. YOUR CLIENT LIST IS
growing, your profits are gradually edging upward, and you are hiring more staff. But is more really better? Oftentimes, more clients just means more—more stress, more responsibility, and more of a draw on resources, but not necessarily more profits.

A new business or practice may be reluctant to turn away a client in the interests of building up its client base. But mid-life and veteran companies often have to ask a difficult question: “Are our clients holding us back? And if they are, do we have the right to turn them down?”

The answer, according to experts, is a resounding “Yes.” Developing the profitable relationships you already have may be the key to real profit growth, since new clients cost more to bring in up front, and there’s no guarantee they’ll be more than one-off customers.

Experts at Loyalty Matrix, a research firm that focuses on customer loyalty and retention issues, estimates that the cost of acquiring one new customer in the financial industry can exceed $350. Of these new clients, only 20 percent will be very profitable, while another 20 percent will simply drain your resources. The balance will pay for itself.

But companies shouldn’t cast a skeptical eye only on prospective clients when evaluating their movements upwards and onwards; it’s also important to evaluate the existing client base. What long-time clients are only marginally profitable? Are some clients more taxing on your staff than they are worth? Do some clients cost more to maintain than they show in profits?

Answering these questions may help to whittle down your client list, realign your priorities and, consequently, see a substantial growth in profits. The formation of deeper relationships with your quality clients is much more important than cursory relationships with short-term or one-off clientele.

The process of manipulating a less profitable client into a more profitable one can be accomplished through Customer Relationship Management (CRM). A general rule for businesses practicing CRM is 80:20: 80 percent of your revenue will be derived from about 20 percent of your clients. Given this rule, a business must consider how it can maximize the profit potential of its top customers, and strategize to serve their needs accordingly.

But first, you need to ID those profitable customers:

• Compare the profit generated by each client versus the total expense necessary to generate that profit. Establish short-term and long-term profit potential; some low-profit clients command an undue amount of time and stress on the organization, but is the potential there to grow?

• Use a rating system for your clients, and consider dropping those clients with the lowest ranking.

• Distinguish between high-potential clients and lower-potential ones in your remaining client base. Who fits your target market? Who has the budget to increase business? Some of your current clients will increase their profitability when given closer attention.

• Keep an eye on your mid-tier clients—and brainstorm. Will a new service offering take them to the next level?

When staff and resources are freed from the drag-down effects of unprofitable clients, they are able to redirect their talents and build more solid business-client relationships. Gathering the information you already have about your clients, such as what their purchasing patterns are with your company, which kinds of investments or services they lean towards, etc., makes it easier to understand what the client values and, in turn, will enable you to formulate an effective—and targeted—marketing plan or customer relationship initiative.

Analysts at Loyalty Matrix conclude that the “key to profitable customer management is to identify the primary motivator that will lead to a more profitable company-customer relationship.” Investing in high-quality client maintenance can also lead to more profitable referrals from pleased clients. And more attentive service can mean charging top-tier prices for services.