Don't Let Bad Clients Drive Out Good Clients
Source: IFAC
In this article, Ronald Baker discusses your firm's client list. Baker notes that rating your customers — “A,” “B,” etc. — based on factors such as annual revenue, prompt payment history, and growth potential is a common practice for firms. Baker lists Ric Payne's criteria for firms to use as they “grade” their clients and consider new ones. Payne's list includes items such as being in business for three years, being willing to receive advice, being technically competent, and having a strategic business plan.
Baker points out that when you accept a new client, you are not just “closing a deal.” You are beginning a new long-term relationship. It makes sense to enter into working relationships with careful consideration. By saying no to the wrong customers, your firm will be better positioned to provide excellent service to the right customers, those who align with your purpose, strategy, and value proposition.
Baker explains that your firm has a “theoretical maximum capacity” and a “theoretical optimal capacity.” Your maximum capacity is the number of clients you can adequately service at one time. Your optimal capacity is the number of clients that enables you to provide excellent service. Often, optimal capacity is 60 to 70 percent of maximum capacity.
Many firms operate close to maximum capacity, but with too many low-value customers. These firms end up turning away last-minute, high-value work from their best clients, resulting in considerable lost revenue. Baker encourages firms to think about how to maximize profit over a given period of time, recognizing that this may mean operating at less than maximum capacity — selling more to the high-valued customers, rather than downgrading your pricing integrity to bring in “price-sensitive” customers.
According to Baker, the most successful firms understand that bad customers ultimately drive out good customers.
For the complete entry, read “Avoiding Baker's Law: Bad Customers Drive Out Good Customers.”
From IFAC, Global Knowledge Gateway, January 6, 2016, www.ifac.org.