Maximizing Client Value

The following is based on one of The Covenant Group’s clients. All of the names and telling details have been changed.

Janet North is, to everyone familiar with her business from a distance, a very successful advisor. In just over 10 years, she grew her practice to a level that is admired and envied by many. Revenues have increased every single year. She has a large support team and her office certainly conveys an aura of success. The walls are adorned with a myriad of civic citations for her charitable work. Her clients are primarily successful business owners and professionals and most new clients come as a result of introductions from existing clients or due to Janet’s high visibility in the community. She can always be seen entertaining her clients, themselves high profile people, at the best country club and restaurants in town. If there is a performing arts function or a charity golf tournament happening, Janet can always be counted on to buy a block of tickets and bring a good number of her clients to the event. By all accounts, she has “made it”.

So why was Janet so stressed when she came to our coaching session? from one of our coaches with such a stressed look? The answer could be found in the document she was flipping through for the umpteenth time. It contained the results of a benchmarking study her sponsoring firm had commissioned us to do. The survey compared individual participants to their peer group, the entire company and the industry at large on a wide range of business metrics and best practices. As expected, Janet’s production, average size sale and assets under management ranked her near the top of her firm. But those weren’t the statistics that were causing Janet such consternation.

“I just don’t get it” she said. “I am one of the most successful advisors in my firm. For the past five years, I have never failed to qualify for President’s Club and in fact, I placed in the Top 10 twice during that time. I’ve always believed that if I continue my rate of growth, I have a real good chance of being #1 in the next three years.”

Our coach interjected, "I believe that you can do it too, Janet. But as you can see, production alone doesn’t necessarily equate to overall success. You scored extremely well on the revenue side of the equation but you ranked in the bottom quartile when it comes to profitability. You are making good money — but there are advisors in your firm who generate substantially less business but who, at the end of the day, run more successful practices. Their profit margin on the business they do is simply much higher than yours.”

“I have always felt that if I simply kept increasing the amount of business, I would be profitable.”

“Of course, increasing your volume of business will increase the total profit of your practice, but it doesn't necessarily increase the profit margin. You are being effective but not as efficient as you should be. Your total expenditure per dollar of revenue is much higher than your peers. For example, one of the measures in the survey is marketing effectiveness. I know you are a great marketer but you are only receiving $60 of revenue for each dollar you attribute to marketing costs. The average of your peer group is more than $190.”

“So how do we fix that?”

“It would be appropriate for us to examine the value of each client relationship you have and compare it to the amount that you are spending to maintain that relationship. From the survey, your total income last year was approximately $600,000. You take approximately 6 weeks per year of vacation and other activities when you aren't working which leaves 46 weeks. On average you work about 45 hours per week. Quick arithmetic tells me that equates to about $290 per hour for your time.

I know you have completed a client segmentation exercise that identified your Top 20 as well as your A, AA and AAA clients, so let's take a typical Top 20 client and look at the associated expenditure compared to the amount of revenue you earn from them. From the survey, your Top 20 clients clearly receive a great deal of attention. You meet with them quarterly for a review; you take them to lunch on their birthday; they're invited to your Top 20 Dinner, a golf tournament; a Client Appreciation event and a Portfolio Manager meeting. In addition, they receive your newsletter, a gift at Christmas and personalized cards from you on all other holidays. From your activity summary in the benchmarking study, you estimated that you spend approximately 12 hours per year of your personal time maintaining a relationship with each of your top 20 clients.”

“I like to treat my Top 20 clients well and I get paid well for doing that.”

“Yes, you do get paid well by your Top 20 clients. They represent 40% of your total revenue, or $240,000 per year — an average of $12,000 per Top 20 client. But let’s continue.

You also estimated that your staff spends approximately 9 hours per year working on your behalf for your Top 20 clients at an average wage cost of $50 per hour. In addition, direct costs for material, the birthday lunch, client appreciation event, etc. come to approximately $450 per year. If we add all that up, you spend in excess of $5,000 per year on each of your top 20 clients. Does that number surprise you?”

“I guess I didn't really think it was that high, but it is a worthwhile investment if they generate $12,000 revenue.”

Yes, it is. In fact, your $5,000 investment per Top 20 client yields you a 140% margin. That’s impressive.

But let’s look further down the list, for example, to your AAA clients. They are, obviously, valued clients as well because they generate approximately $150,000 of total revenue. You have identified 45 clients as AAA’s so the average revenue they generate is about $3,300. You aren’t quite as lavish with them as your Top 20 clients. They get semi-annual instead of quarterly reviews, aren’t, obviously, invited to your Top 20 Dinner and do not attend the Portfolio Manager meeting. Other than that, they get everything your Top 20 clients receive. When we add up the variable and fixed costs associated with your AAA clients, the average total expenditure per A client is $3200 compared to $3300 per year of revenue. So you are effectively not making any money on your AAA clients. They're great people to have as clients but you are simply spending too much for the revenue they generate. There is no margin. The story is very similar when it comes to your AA clients. They generate, on average, $1300 per year of revenue and you are spending about $1100 a year on them. Paradoxically, your A and non-profile clients yield the highest margin because you commit very limited resources to them. Unfortunately, the dollar amount of net profit they generate is very small.

You are right to differentiate the level of service and marketing you provide by the value of each client. However, it is essential to appreciate the value of each client and then allocate your resources commensurate with that value.”

“So what do I do about that?”

“There are two solutions. One would be to reduce the level of personal contact that you have with your clients because, quite frankly, that is the biggest cost item for you – the value of your time. We don’t want clients to feel your commitment to them has declined so we’ll have to be careful with how that is done. Leveraging technology and the time and talents of others in your practice may be one way to do that. The other would be to increase the average revenue you receive from each client. Which do you think would be easiest to accomplish?”

“How about a combination of both?”

“That’s what I was hoping you’d say. The strategy would be to create a service level agreement and marketing activity schedule that you deem appropriate for each client segment. It should detail specifically the activities and service you want to provide. By calculating the costs and comparing them to revenue by client segment, we’ll identify where the margin is unacceptable. From there, we’ll look for ways to cross-sell, move upmarket, increase share-of-wallet, increase introductions and so on. There are a number of ways we can make each client relationship more profitable.”

Over the next couple of weeks, we worked together to help Janet define what she called her Client Experience and adjusted it to ensure it yielded a fair margin at all client levels. Where those margins were thinner than desired, we designed a marketing, sales and service program to increase the value of each relationship. One year from now, her company will conduct the benchmarking survey again to measure progress and my guess is that Janet will rank very near the top in ALL categories.

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