Today’s best marketers differentiate the value they deliver to their top customers from what they deliver to everyone else. Then they let the best clients know they are getting special treatment. And, finally, the top marketers ensure they are delivering that superior experience to the right clients.

Over the past few years, many successful advisors have come to accept the principle of segmenting their client bases. Many have divided clients into categories such as “A”, “B” and “C” or “platinum,” “gold” and “silver.”

Typically, advisors have become much better at providing different levels of service to different levels of clients. They have come to realize it is critically important to differentiate how they treat their top clients because the top tier is very important to the overall profitability of their businesses.

In recent years, the consulting firm Stern Stewart & Co. has pioneered a methodology called “economic value-added” and has worked with many companies to analyse the profitability of their customer base. Stern Stewart has worked in a wide range of business categories, and what it has discovered is a striking consistency in how companies make their money.

So, what percentage of the typical firm’s total profit comes from the top one-third of customers, as ranked by profitability? Before reading further, think about this for a moment and make a mental guess.

Most advisors guess anywhere from 50% to 90%.

Stern Stewart has discovered that for the typical business, when all costs are fully allocated, the top third of customers by profitability account for anywhere between 120% and 200% of the firm’s profits.

The middle third of customers, ranked by profitability, typically break even — or may account for 10% or even 20% — in terms of the firm’s profits.

And the bottom third of customers, ranked by profitability, virtually always hurt the company’s bottom line. In some cases, those clients cost the firm large amounts of money when all the costs are accounted for.

(Here’s how the math might work: if an advisor nets $100,000 after provision for time and overhead, the top one-third of clients contribute profits of $150,000; the next third contribute $10,000; and the bottom third costs the advisor $60,000 because these clients take up time without making a meaningful contribution to offset that time.)

So, to run a good business, you have to organize yourself to treat the top third of your clients in a way that reflects their profitability. And if you are going to deliver special treatment to that top third, you also have to be sure that you have the right clients in that top segment. It’s in this area that many advisors still have work to do — developing a sure way to select their top clients of importance.

The most common criterion for defining top clients is based on assets or commissions generated. While this captures the most immediate short-term measure of a client’s impact on the bottom line, it misses a number of other important elements in the equation.

For one thing, neither assets nor revenue alone reflect future potential. They don’t account for assets a client has elsewhere that you may be able to move into your book. Nor do assets reflect where people are in their life stage as investors. You may have two clients with the same amount of assets, but if one is 45 and the other 75, they probably represent different potential for additional assets down the road.

Another factor missed by focusing simply on assets and revenue is how much time a client consumes. Time is the largest single cost you will incur in dealing with your clients. Again, you may have two clients with similar assets, but one is located two hours away, expects you to drive out for a quarterly meeting and is constantly on the phone in between meetings. The other, however, is content to come into your office for a semi-annual review and seldom calls. These clients may have similar revenue levels, but they represent very different bottom lines.

Still another important dimension in assessing profitability is how difficult it is to deal with someone.

We all have clients with whom it is a pleasure to deal; they are positive, appreciative and fair-minded in the way they deal with short-term setbacks. These clients give us energy and enthusiasm for the rest of the day.

@page_break@Then there are clients at the other end of the spectrum — those who are negative, difficult and critical, who are constantly looking to assign blame if everything doesn’t go just right. Talking with these clients creates a sinking feeling in the pits of our stomachs and makes us less effective in dealing with our other clients. It’s even worse if these clients are critical of and, perhaps, even abusive in their dealings with team members.

To reflect fully clients’ profitability, you have to take into account the impact that dealing with them has on your, and your team’s, overall productivity.

Then there are the other variables specific to your business. If you are shifting to managed money, for example, a client who buys into that approach is more valuable to you than one who doesn’t. Or if you are concentrating on building your business in a specific client segment, you will want clients that fall within that group.

Not long ago, I talked to one advisor who had gone through the process of categorizing her clients in a very methodical fashion.

She identified five factors that drove the profitability of clients in her business. Working with her assistant, she then spent two lunch hours each week going through her client base, scoring each client from zero to five on each of these factors, so a client could end up with a profitability score of between zero and 25.

Once she had completed this task, she took a hard look at her low-scoring clients, and in some cases parted company with them. She then divided her remaining clients into four categories, and established different service standards to reflect the importance of the clients in each of those categories.

Doing this was a big investment of time; it took three months to work through her entire client base. The impact on her business was substantial. She discovered that some clients who ranked high on assets and revenue scored low on the other dimensions and were in the second or third quartile in her profitability score. She also found that other clients, who were well down the list in assets and revenue, moved up when she took a broader look at their impact on her business. IE



Dan Richards is president of Strategic Imperatives Ltd., a Toronto-based consultancy that delivers training programs to financial advisors. He can be reached by e-mail at richards@getkeepclients.com.