Are You Dependent on Just a Few Clients? If So, a 50/30 Alarm System Can Help
The Independent Consultant
Are You Dependent on Just a Few Clients? If So, a 50/30 Alarm System Can Help
by Shelley Hall
You've heard it hundreds, maybe thousands of times: 80 percent of your revenue is generated by just 20 percent of your clients. By now you know this old axiom applies to many areas of business, but it is particularly true in sales. In today's aggressively competitive environment, this rule of thumb might be even more effective if we reset the parameters. Think of it this way: If 50 percent of your business comes from 30 percent or less of your clients, an alarm should go off! That alarm is telling you to expand your client base and think about how you market your services.
If the new revenue axiom applies to your company, it's time to quickly expand your client base by attracting new clients. But before you run out or send your sales team off with orders to sell, sell, sell, you'll need a customer acquisition model that will attract the right customers. It takes time and valuable resources to win new business. Why not seek and close those clients that will be long term because they derive the most value from your services?
Consider this process for uncovering your best clients and serving as a foundation for attracting great new clients:
Identify Your Current Dependencies
Begin by examining your current clients and determining your revenue metrics. Does the 80/20 rule apply or the 50/30 rule? Identify the clients that generate the bulk of your business and be sure that those relationships are strong and thriving. You can't take these clients for granted while you make a shift in your strategy away from dependency. Talk to these clients often, service them to the hilt and be sure they are receiving real value from you. This work is the "CYA" part of the process.
Expand Your Revenue Base by Replicating Your High Value Clients
Attracting, closing and servicing new clients takes time and money, so your sales strategy and focus had better be directed at the right clients. And how do you define the "right" clients for you specific business? Such definition requires more than just a ranking by revenue or by margin. While those may be the starting point, the definitions of your best target prospects also include understanding who your best prospects are, a process of "iterative evaluation" which at its conclusion will result in a clear set of client characteristics. These will become the definition of your best new business targets. Identify your top 15 to 20 revenue generating clients and then begin the evaluation process below to uncover which characteristics make up your best prospects. Steps include these:
Step One: Ranking by Value
Rank each of your clients by their value to your company, established by the following three factors:
At this point in the process, margin contribution is more important than revenue since, by getting to this point, the client is already a high revenue generator. At this point the highest margin wins.
Next assess and rank clients by their growth potential. Honestly ask yourself, is this a client that will grow? If so, by how much and over what period of time? Will they want the new services/products you plan to deliver? Have they bought or will they continue to buy services that "marry" them to your firm, making it difficult to move to a competitor? What does the long-term financial picture of this client look like? Is the client's management team focused on long-term or short-term value? The growth potential should be viewed from a three-year, five-year and 10-year perspective.
Your value clients are those that benefit most from your services/products and that have a strong strategic, cultural and value fit with your company. If your services/products are designed to enhance a client's short-term value but your client company has strategically taken a long-term view, the strategic match is not strong. If you've built your company on a "high-touch, high-service" model and your client is selling on price, with service to his customers as an afterthought, how much value does your client place on the high service they receive from you? When you raise prices, will they value your service quality enough to offset the price increase or will they run to the lowest cost provider because that's what their customers do? Are your cultures compatible? Long-term client partnerships are achieved when you both honor and reward the same values.
Step Two: Looking for Common Characteristics
Now look at the common characteristics of clients that ranked high thus far based on their "value" determination. Identify and list such client characteristics such as:
You're looking for commonalities that could point to future prospects. If all of your clients sell complex products, your strategy might be to market only to companies with complex products. Uncovering the similarities help to create compelling success stories that will resonate with prospects and shorten your sales cycle. Understanding the similarities can speed sales training and product development.
Step Three: Gauging Your Value to Your Clients
What products or services are your high value customers buying from you? Can you develop a list of recurring and similar problems you are solving for these clients? What business problems do your clients solve for their own clients? How does your service help your clients solve their clients' problems? Within your client's organization, who buys from you? Do you know why they buy from you? For real answers to most of these critical questions, do something frequently forgotten: ask your clients! Talk to those clients who rose to the top of your rankings as a result of this evaluation process. Ask them why your services have been important to their success. Then ask them for referrals to companies they think match your newly identified target prospects.
Realigning Your Sales Strategy and Sales Force
By honestly and carefully employing this process so that you truly understand who are your best customers, and why, you will now be in a position to expand your customer base by targeting and closing the right clients, not just any clients. It's time to realign your sales and marketing strategy to focus on these prospects and to realign your sales reps so that they effectively prospect and close based on your new set of client characteristics. Do you need to switch from territories to industry verticals? Do any sales reps you employ need training of any kind in order to act as "business consultants" when they represent you to a newly defined target client? Does your compensation structure need updating in order to reward and encourage a new prospect focus?
Perform this 50/30 rule analysis annually to monitor your progress at moving beyond just a few clients. It's an analysis that will also serve as your early warning system. If the metrics are good and your dependency has been eliminated and it does not degrade over time, then good for you! But regardless of your progress moving farther and farther away from dependency, do perform the complete analysis at least every three years. That way you will be sure your ideal client characteristics have not changed, because if they have, you'll now have the data to drive your strategic change back in the right direction as you pursue your sales and marketing objectives.
Shelley F. Hall is principal of Catalytic Management Consulting, specializing in business performance and growth consulting. Catalytic's mission is to enhance its clients' profitability by delivering customer-focused solutions for increasing revenue and improving operational efficiencies. Visit their Web site here.