Most practitioners will be aware of the 80:20 rule, many may not know that this describes the Pareto Principle: originally, the observation that 80% of Italy’s wealth belonged to only 20% of the population.
As a generality, you may find that 20% (or thereabouts) of your clients provide 80% of your profits. If you have the stamina for this type of naval gazing, and it can be instructive, this is what you need to do. You will need a breakdown by client of:
- Total costs to produce the revenue, and by difference
- Profit contribution by client
If you have abandoned the classic time ledger, this may be difficult to piece together.
What you will likely find, is that Pareto is active in your practice, and that give or take 5%, 80% of your profits are provided by 20% of your clients.
Of the 80% of clients that drive 20% of your profits, once you have determined who they are, you have choices; who should you politely advise that you can no longer support the level of service you provide at the present fee levels. Estimate future annual fees based on a profitable return, and you will probably find most unprofitable clients will slink away to find a new, and cheaper home.
Of course, there are other factors that should be considered:
- Is an unprofitable client also one of your key referral sources?
- Is the client a likeable or unlikeable character?
- What do your staff think?
It is never an easy choice to sack a client, and yet client numbers per se should not be your goal.
We would love to hear from practitioners who have adopted the annual cull of clients to constantly improve profitability. Send your thoughts to firstname.lastname@example.org