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Archive for September, 2007

Focus on Relationships Not Transactions

September 27th, 2007

I was talking with one of our members recently and she mentioned that her firm’s marketing strategy has been to focus very much on building a strong relationship with its clients. She went on to say that rather than seeking new clients her marketing concentrated more on looking for ways to increase revenue from her existing clients, for example by offering insurance services, mortgage and general finance broking and personal financial planning. She felt that picking up new clients is a logical consequence of referrals from existing clients who are delighted with the relationship they have with their service provider.

I couldn’t agree more.

Delighted clients are the major source of profitable firm growth not only because they are the source of quality referrals but also because they are the people who are most likely to be receptive to additional services and are much less likely to be price sensitive or “service shoppers”.

Delighted clients are the sole source of “good” profit as opposed to “bad” profit. At another time I’ll talk more about the good versus bad dichotomy because I know there are many people who wrongly, in my view, believe any profit is good. For now, let’s just accept that “bad” profits are profits made at a customer’s expense.

But … and here’s the big but! Not all your clients fall into the “delighted” category and you might be surprised to discover that the majority don’t.

Having a good relationship with a client is a lot more than having a client on your books who you have a “good rapport” with. People need accountants. We know that. We also know that once someone starts working with an accounting firm there are switching costs that can be quite significant. That is, it is both inconvenient and costly to jump from one accounting firm to another.

It follows from this that although a firm may not see much client turnover it is dangerous to assume its client base is delighted with the service and is very loyal. In fact, if your firm is like most firms, more than 50% of your clients feel a sense of being trapped (because of their perceived switching costs) that ranges from very strong to weak.

Not only that, if you are a “typical” firm then at best only 10-15% of your clients are likely to refer you to a friend or associate and it’s highly likely that at least 5-10% are detractors who, if asked, will actually dissuade their friends or associated from dealing with you. The remaining 75-85% are ambivalent.

If you are in any doubt about this stop and think about it for a second. If 15% of your clients were referring just 1 client each to you (and the fee they paid was equal to the average fee paid by your clients) then your revenue would be growing at 15% a year. Your fees would double every 5 years! If you’re not growing at that rate year-on-year then one or a combination of factors must be at work: (1) you are losing clients, (2) your prices are dropping, (3) your average fee is falling and/or (4) you are getting much less referrals than you might think.

In recent years it has become very common for accounting firms to partner with financial service providers. These partnerships offer terrific synergistic opportunities for both parties and both have done extraordinarily well in the buoyant economic conditions that have prevailed in recent years.

However, to a very significant extent, marketing of professional services is being driven by financial services partners and is focused on transactional opportunities such as “here’s an opportunity to switch to a lower interest mortgage”, or “we can get a great leasing deal for you” or “now’s the time for us to review your retirement plans and investment strategy” or “let us refer you to a lawyer who can review your will” etc. etc.

There is no doubt that buyers of these services have received value in the economic climate we’ve experienced in the past decade but I wonder whether the marketing process that seems to have become commonplace augers well for developing good solid long term relationships with clients.

I’m often told it is easy to make money from services like insurance, lending, tax-effective investments and traditional investment planning – also rather cutely called wealth management. There is absolutely nothing wrong with this because it’s obvious that people need these services (I specifically exclude tax minimization schemes because the tax authorities around the world are systematically attacking their architects and vendors). But when it’s described as “easy money” I think we have some cause for concern.

Customers are not stupid. They can sense when a firm is driven by self interest rather than their interest. Simple little things like a phone call to see how things are going or better still, a site visit, speak volumes to clients about how their service provider views the importance of a relationship. No less important is responding to phone calls or emails within a reasonable time. I’m astounded at how poor some service providers are at this simple courtesy.

Fred Reichheld, a Director of Bain Consulting and at one time a member of the Harvard Business School Faculty has spent a good part of his life researching the importance of loyalty on business performance and sustainable long term growth. His principal published work is called The Loyalty Effect and more recently, he published The Ultimate Question. Both of these books are required reading in my view.

He suggests that there is only one metric that is important to business value growth and that’s what he calls a Net Promoter Score (NPS). This is calculated by asking customers to rate, on a scale of 0 to10, “How likely is it that you would recommend <<the name of your business>> to a friend or colleague?”. People who select 9 or 10 are classified as promoters Those who score in the range 0 to 6 are classified as detractors. The NPS is simply the difference between the percentage of promoters and the percentage of detractors.

Reichheld provides some very impressive empirical research to support his proposition that businesses with a high NPS are superior performers in their industry. The path to long run sustainable growth, he suggests, is closely tied to doing what needs to be done to increase the number of promoters and decrease the number of detractors. Sounds simple and conceptually it is. The hard part is putting some practical initiatives in place that lead your clients to feeling positive about the relationship you have with them.

With that in mind, professional service firms especially must make their clients feel that they care and that they (clients) are not being “sold” solutions that are obviously profitable for the service provider with little regard for the client’s benefit.

This is what forming a professional relationship is all about. It’s not purely a transactional relationship. When people feel that you are focused totally on their wellbeing and you deliver consistently then you will have a Net Promoter Score that is high and positive. If your NPS is low or negative you have some work to do. Perhaps this is something you should be measuring.