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Practice profitability: Segment your way to success

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6th Aug 2013
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As many practice management gurus have said in the past, identifying and segmenting your clients into different categories can lead to better results. But could this approach overcomplicate client relationships and block potential sources of growth? Robert Lovell investigates.

For any growing practice, the most important thing is knowing who your ideal clients are. 

Once you have identified what they want, you can provide a better service and enhance client relationships.

Customer segmentation is accepted as the best approach to achieve this.

By focusing on your ideal client you can work out who’s going to give you more growth and more profits.

A market segment is a subgroup of people who share single or multiple characteristics that give them common product or service needs. As such there’s a big chance that they would respond in the same way to a particular marketing strategy.

Your clients will have different needs, for example some will just want basic, compliance-only services. Others will require more specialist attention or value-added services depending on their needs and industry.

Segmentation has become more prominent in accountancy as the profession grew more accustomed to marketing and selling.

Smaller firms are increasingly using simple customer relationship management (CRM) software and techniques to probe deeper into their client base, organising clients for example by age, sector and profit.

Segmentation top tips

· Differential: market segment has to be different with different market mix

· Actionable: have a product to be accrued for this segment

· Measurable: measurement of size and purchasing power

· Accessible: possibility of reaching efficiency

· Substantial: segment has to be large and profitable enough to merit the special focus.

The mechanics

One of the greatest challenges is knowing what to segment. A good place to start is by focusing on the clients you believe will be most profitable. You should be aiming to reach them with targeted messaging.

By segmenting existing clients into groups you can also identify who spends what when, which can help you device new products, services and marketing campaigns to get them to buy more. But complex segmentation can lead to increased expense in message testing and research, particularly if you create too many segments.

To get started, analyse your existing clients. Build a picture of their past purchases to identify trends. If this data isn’t available, carry out face-to-face or telephone research.

You can then use this data to split them into groups according to factors such as spending patterns, industry sector, income, age and location. In the classic model adopted by many practice development advisers, clients will be graded as A, B, C, D etc according to their profitability and desirability for the firm.

You can then target your marketing to where your most profitable customers are most likely to see those messages and develop new services to suit the different subgroups.

One thing to consider is giving a consistent message across all your marketing material and have that reflected on your website, even if that means having dedicated parts of the site for different clients.

The pros and cons

Understanding and recognising segments comes from experience, according to Mark Lee, consultant practice editor of AccountingWEB and chairman of the Tax Advice Network. Lee is a big fan of targeting prospective clients who have more in common than simply being owner/managers or SMEs.

“One of the most compelling ways to win new clients is by talking with them about existing clients who are like them. You can share more powerful and relevant stories about how 'similar' clients had specific issues and problems and how these have now been resolved since working with you,” he said.

“Of course you can do this when talking about clients in general, but if you have segmented them you will have more relevant and compelling stories. You will also stand out from the other accountants who talk only in generalities and probably only win less profitable work.”

Practice management consultant, Mark Lloydbottom, also told AccountingWEB that separating out clients into categories was important.

“Some clients require a more personal service than others. It is not poor service to treat some better than others,” he said.

However many in the profession, including a number of AccountingWEB members, have their doubts about segmentation.

In an Any Answers post from 2011, members discussed ignoring all the marketing advice in an attempt to be all things to all people. For example carnmores argued that accountants need a broad range of clients, but that niche services were a welcome and profitable addition to the general range.

OldAccountant went further: “Segmentation and specialisation are dangerous as you immediately reduce your potential client pool by about 90%.”

This last point is one of the potential disadvantages: by focusing on high profit clients, you fail to take on a broader pool of clients, and therefore cut yourself off from large numbers of new prospects.

While successful segementation is a powerful aid to profitability, the message has been heard so often that many profit-focused practitioners often sound the same. If more practices start targeting the same high growth businesses and wealthy individuals, they will find it harder to differentiate themselves from each other.

Rather than focusing purely on profitability, segmentation can help firms identify specialist niches and develop services for specific trades, sectors or interest groups. It may cost more to develop specialist services, but as more clients are recruited within the segment, the firm’s profit margins should grow as skills and processes are shared more widely between the niche clients.

Specialisation has many attractions, according to AVN’s Steve Pipe.

“You can’t be all things to all people,” he said.

“In life, people (including you and I) are generally prepared to pay more for a specialist. So, providing you get your pricing right, specialising pays off financially for the practitioner.

“And of course, true specialists should also be able to do a better job than generalists who dabble. So specialising also means that clients get a better service,” Pipe said.

In some cases not specialising can be disastrous for the accountant and their clients, since there may be nuances and technicalities that a generalist misses, he added

“Those failures can cost clients a fortune in unnecessarily high tax bills, penalties and missed opportunities, and cause major damage to the accountants’ reputation.”

Future steps

Segmentation has developed in tandem with CRM systems. Most firms already store contacts electronically, but if you hold the information in a CRM database, it is easier to track and measure your contacts and marketing efforts over time.

With a CRM package, all the relevant people within your firm should have access to the status of each client, making it easier to serve them more effectively. A structured CRM database will also help you segment clients according to factors such as location, industry sector, income, interest or demographic. In some cases, systems that integrate with tax and accounts software will let you run client queries based on criteria in your data, so you might craft an approach for company car owners, or those who submit capital gains tax returns.

If you are interested in segmentation and a more disciplined approach to marketing, it may also be worth researching CRM for advice and techniques on putting the theories into practice.

Further reading:

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