Sorting your client list for better profit margins

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It seems entirely unreasonable for newer business owners to suggest we would be the ones to eliminate paying clients from our client list. For those of us more entrepreneurial seasoned types, we know making space for higher-quality clients is necessary for long-term success.

I remember the feeling well of starting my own practice years ago—the sense of accomplishment and excitement every time a new client signed a proposal. Then, over time, and with the experience of losing your shirt on projects, you start to be able to discern better between clients who give you money and clients who are actually valuable.

As a practice, I started to perform what I referred to as an ABC analysis at the end of each year, or the end of each tax season. This process simply applied a ranking system to each client, either an A, B or C. A clients was your cream of the crop. These clients made up the top percentage of your revenue, they were the highest paying clients, and they always paid on time.

These clients see your value, sing your praises, send you referrals and you enjoy working with them. If you could duplicate these clients, you would.

The A clients not only stay, but they also become your “avatar” of what an ideal client looks like. In other words, you identify what these clients look like and then devise a marketing strategy around trying to find more of them.

B clients are middle of the road. They may not make up a significant portion of your revenue, but maybe they provide you with great connections. Maybe you love working with them and they always pay their bill on time. They are not quite as ideal as an A client but it’s an easy working relationship that still provides value. These clients stay too, but you’re not necessarily tailoring your marketing to growing this base more.

Disengaging from clients can feel scary and unnatural for sure. After all, don’t we work all year to grow our client base? But growing our client list when the work isn’t profitable does not promote long-term success for us either.

C clients are the ones we want to look at closely. They are a thorn in your side. These clients are not providing a significant portion of your revenue, and they’re difficult to work with or always paying you late. They’re more work than they are worth.

These clients can be just very low dollar and expect a lot of service, or maybe you just constantly have to be chasing them. Either way, they are sucking your resources, including your energy. These clients need to go.

In order to make space for more A clients, which will bring significantly more profit margin per client than a C client, you need to create attrition. Once you have identified your C clients, consider disengaging from at least the bottom 3%-5% on your list.

Disengaging from clients can feel scary and unnatural for sure. After all, don’t we work all year to grow our client base? But growing our client list when the work isn’t profitable does not promote long-term success for us either.

Creating space for profitable projects provides a host of benefits to the firm as a whole. You and your team will be happier working with clients that bring a more mutually beneficial relationship.

Happier teams mean less turnover, more stability, lower costs and happier clients.

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