How to categorise your clients
Some clients are more valuable than others, but how you decide who gets the A-list red carpet treatment and who's in the bargain bin? Mark Lee offers some assistance for practitioners.
Everyone wants to treat all clients the same, but we also know that some clients are more valuable than others; so how do you prioritise when you have to?
I’ve long felt that it makes sense to assume that your most valuable clients are on an A-list and your worst clients are on a D-list. (I’ll get to the B and C-list clients in a moment).
A-list clients are those who are making a major contribution to your practice and you want to ensure this continues.
D-list clients are the ones who are dragging you down, consuming resources and preventing you from enjoying your work as much as you could do.
One accountant told me that after he merged his practice with another sole practitioner, they went away for a weekend to analyse their newly merged client base. He found that 80% of his clients made no contribution towards profitability. All of their profits came from 20% of their clients, the rest just kept them busy. This 80/20 split is very common. The worst D-list clients often comprise 20% of a firm’s client base.
Each accountant has different criteria for determining who their best or most valuable clients are. The most obvious factor might be the level of fees charged each year, but is that the only way you assess the relative value or importance of your clients? It may be.
However, when I ask accountants they suggest a range of other factors including:
- How much they like working with the client
- How interesting and varied the work is
- The extent to which the client effects valuable introductions
- How reasonable the client is (i.e. whether they seek and take advice, are likely to pay extra fees for special work each year, respond promptly, pay on time, etc.)
There is one factor that is rarely raised and yet it may be the most important of all. How profitable are those ‘best’ clients? Indeed, how many accountants have the systems in place that would enable them to determine the answer to this question?
In 2001 I joined WJB Chiltern and took responsibility for the Tax Support for Professionals team. The team’s clients were largely smaller firms of accountants (this was the inspiration for the Tax Advice Network that I established in 2007).
I wanted to know who were Chiltern’s A-list client firms of accountants; these would be the accountants I would visit first - the accountants where I would hope to generate the best return for time invested in building relationships.
When I asked the Chiltern team they initially identified a number of supposedly key clients - or so they thought. In fact, these were simply clients who were in regular contact, often on the phone and certainly who were front of mind. Although the consultants were happy dealing with those clients, they had no idea if they paid on time or the aggregate fees earned from such clients.
A little research revealed that all of the named clients were amongst the least profitable ones for the consultancy. They regularly made use of a low cost telephone helpline but didn’t use the firm for any high value work. They consumed Chiltern’s resources and cost the firm money that was not matched by the fees earned from those same clients. In effect they were exploiting the firm’s loss leader service proposition. Were they Chiltern’s ‘best’ or most valuable clients? No.
Some firms are able to identify their most important clients by reference to the information in their customer relationship management (CRM) system. Others have a gut feeling. Whatever works for you is fine; but do make sure that you are not fooling yourself. Clients who are front of mind may not be the most profitable or indeed the most valuable.
In my view, these are the clients who are not on your A-list but who you have determined have the potential to get there. They might own smaller growing businesses or have the potential to make valuable introductions (but you have yet to ask them to do this). Perhaps they will be seeking additional help and advice as their business grows. Maybe they are relatively newly acquired clients so it’s too early to tell.
You will want to explore and to cultivate relationships with them to see if you can help them move them up to the A-list. I suggest you only do this after ensuring you have cemented your relationships with the proven A-listers.
These are the clients who are no trouble but are unlikely to ever pay higher value fees, make valuable introductions or otherwise make it onto your A-list.
There is a danger of assuming that many of your less engaged clients are C-listers. That assumption may deny you the opportunity of finding out their true potential. A client feedback survey may help you to clarify the true position.
I regularly encourage accountants to ditch their bad clients. There are two primary reasons for this:
- Following the Pareto (80/20) principle to which I have already referred, you can be sure that your worst clients (however small the number) cause the bulk of the problems and hassle that you suffer. Conversely, 80% of your profits are typically generated by A-list clients who probably constitute just 20% of your client list.
- Your worst clients are more likely than your better clients to refuse to pay for work done, to find reasons to report you to your professional body for unprofessional conduct, fee disputes or even to claim you have provided negligent advice.
Everyone will have their own way to determine what are (to them) D-list clients. My list includes clients who display two or more of the following troubling tendencies:
- Resisting any increase in your fee to reflect additional work they have requested (assuming that you would notify them of the increase before starting the extra work).
- Appearing not to value your time or advice.
- Insisting on ‘gut feel’ advice rather than fully researched advice.
- Using buzz words and terms that they evidently don’t really understand.
- Regularly needing to be chased up to provide information or other responses to your enquiries.
- Delaying production of key documents until the last minute.
- Failing to keep their promises as regards the standard of their records.
- Not paying your fees in accordance with your payment terms.
- Are rude or otherwise unpleasant to you or your staff.
Clearly there is no point allocating clients across these four categories unless you plan to do something as a result. What might that be?
Mark Lee is chairman of the Tax Advice Network and consultant practice editor for AccountingWEB.co.uk.