Client Classification: Finding the Win-Wins to Generate more Profit

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Client Classification:
Finding the Win-Wins to Generate more Profit

If you are a manufacturer, an important business asset will include your factory and the machines inside. Taking good care of the machines will help them work more efficiently and preserve their working life. Sounds like smart business.

In an accounting business, what are your most important assets? Your client base will rank high on the list so, logically, you have to take care of clients through good service and relationship building. But deeper analysis of the entire body of clients helps prioritize and maximise the value of this ‘asset’. A starting point is client classification.

But there is more. The businesses you want to work with are probably better and more successful businesses than those you don’t want to work with. If that’s the case, why not focus on making your clients better for them… and for you. That’s a win-win.

There are various ways to classify clients (and Panalitix offers proprietary tools for this purpose). First step is to identify evaluation criteria which tie into your business strategy.

Let’s first look at some Financial Criteria:

  • Gross margin: A pretty simple place to start. The more profit you make from a client, the more valuable that client is. Sometimes a business is in ‘customer-acquisition-at-all-costs-mode’ (think Uber in its early years) but this is an exceptional (and probably unsustainable) phase.
  • Revenue: Clients which attract high revenue may be appealing because you want to meet your top-line growth goals or you want to be attractive to an acquirer. And if the business is well-run, increased profit will follow.
  • Lifetime value (LTV) tries to capture revenue and profit over the entire period (the lifetime) you will work with the client. How do we calculate LTV? Here are some simple steps:
    • Assume your business has 1,000 clients and your annual revenue is $10,000,000
    • This implies an average annual revenue per client of $10,000
    • Multiply this by the expected duration (lifetime) of the client relationship in years, e.g. 2 = $20,000
    • Now consider the average annual cost of serving a client, say, $4,000 ($8,000 over two years)
    • Deduct this from the gross figure ($20,000) to arrive at an LTV of $12,000
  • Growth (Cross-selling or up-selling) opportunity: The above LTV analysis is based on CURRENT data, that is, how much of your CURRENT products (or services) you sell at CURRENT prices with CURRENT levels of retention. If you plan to introduce new products (or retire products), the average annual revenue per client may be affected, hopefully increased. The question, then, is whether the client will likely take on your new product(s). You need to factor in the growth potential when evaluating clients. (Panalitix’s MarketDecoder is an excellent way of evaluating client needs to understand what drives clients to buy from you).

There are also Strategic Criteria (in addition to Financial Criteria) which influence how you classify clients. Here the financial benefits are less direct or harder to define.

  • Strength / Potential of the client’s business: Generally it’s desirable to work with strong, growing, well-established businesses. This is evidenced by their growth-rates, market share, what’s going on in their industry and other financial indicators. Successful businesses will likely need more services and be around for a long time. There may be exceptions, for example, if you work in the area of liquidations or insolvency.
  • Strategic Target: You may be seeking a certain type of client because you can excel in that area or it differentiates you from the competition. Examples might include international businesses, listed companies, entities subject to a particular regulation or businesses operating within a certain industry.
  • Referrals: This can happen where the client is well-connected and willing to make referrals.
  • Reputation: Some businesses are sufficiently large or reputable that they create value in your business PROVIDED THAT you are able to mention them in your marketing or selling activities. A small accounting firm with small clients might greatly value the opportunity to call a prominent listed company their client, for example.
  • Share of spend: How important are you to the client? Are you one of many accountants they use? How easy would it be for them to shift their business to another provider? A client which greatly values your contribution and is heavily invested in the relationship with your firm is likely to stay with you longer.
  • Easy to work with: It is better to work with clients who are cooperative. This will be a factor in some cases.
  • Pays the bills on time: Having to chase money is irritating and a waste of time while upfront, consistent payers are a joy!

Having established a list of criteria, examine their relative importance (because they are not all of equal importance). One output of Panalitix’s ClientClassifier might look like this:

Classification Criteria

Score (out of 100)

Lifetime Value

50

Growth Opportunity

20

Strength / Potential of Client’s Business

10

Referrals

10

Reputation

10

Total

100

In the above case, the business highly values LTV and then the growth potential. Important to note that every business is different in terms of what they value.

Now evaluate your clients against these weighted criteria. In Panalitix, we use a 1 to 7 scale where 1 suggests poor performance on that criteria. Our analysis may look like this:

Classification Criteria Score (out of 100) Client 1 Client 2 Client 3 Client 4
Lifetime Value 50 5 4 4 2
Growth Opportunity 20 4 2 2 6
Strength / Potential of Client’s Business 10 5 6 4 3
Referrals 10 4 2 6 4
Reputation 10 2 4 3 5
Total (weighted score) 100 440 360 370 340
Class   A B B B

In the above analysis, Client 1 is the standout client that is performing best on the (weighted) criteria. Clients 2, 3 and 4 are similarly positioned well behind Client 1. Depending on the size of your client base, you might arrange these is bands such as “A”, “B” and “C” for ease of reference.

What to do with this information?

This may seem complex and a lot of work but once the system is set up, it’s easy to manage and here’s how it adds value in your business.

  • Don’t take on clients that won’t meet your thresholds
  • Actively drop clients with low scores
  • Conduct marketing activities (or touchpoints) to attract new clients which will fit your criteria
  • Manage existing clients to increase retention and attract new revenue. (Consider ClientInsights, a proprietary Panalitix tool for these purposes). This may come from improved service standards such as more face time, individualized contact, provision of high-value information, business introductions, nomination for awards, speaking invitations, published congratulations on achievements, sponsorship of clients’ initiatives and so on.
  • Think of ways to help your clients score higher. How can you strengthen their business? Or their reputation? That will result in a win for you and your client.

Some final pointers on client classification:

  • Make sure EVERYONE internally is aware of and understands the classifications. You are striving for a consistent and efficient application of these rules
  • Recognize that things change both in your and your clients’ businesses. Revisit your analysis every 6 months at least
  • Keep this confidential. Clients should not be aware of how they are classified (with some exceptions, perhaps)

Set out to help clients become better clients for you, then you’ll probably be helping them be better businesses. That is a win-win situation.

ABOUT THE AUTHOR

Mark Ferris
CHAIRMAN & CEO, PANALITIX

Mark is an entrepreneur who has founded, built and sold a number of businesses, mostly in the information technology industry. His businesses have served major multinational companies in areas including business intelligence, process improvement and procurement across Asia, North America and Europe.

As an investor, Mark focuses on early-stage technology businesses with an interest in SaaS companies and providers of content. Mark lectures in an Executive MBA program on entrepreneurship, mentors numerous businesses and is a frequent speaker in business forums.

ClientInsights

ClientInsights helps your business to secure additional revenue by identifying valuable new sales opportunities amongst your clients.

It’s a tool that asks your clients to assess their current and anticipated needs across a broad range of key areas. ClientInsights then reports recommended priority actions for your business and your client to consider, cost and implement.


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