21 Oct 7 Questions
The legend is that Dr. Albert Einstein, while at Princeton in the early 1950’s, was asked by a student; “Professor, what is the most powerful force in the universe?” He is reputed to have answered, “Compound interest!”
For much the same rationale, at Tenacity, we would argue that the most powerful economic force in the world of business is improving client retention. As Frederick Reichheld wrote in his book “The Loyalty Effect”, “Few companies in any industry truly understand the enormous economic leverage of retaining their clients.”
The economic case for investing in improved account management and a formal process of client retention is a powerful one. Just as compound interest adds to the principal each time it is paid, the client that you retained, which otherwise would have been lost, makes payments every single year (and every year after that) into the profit column on the P&L. A stable base of satisfied and profitable clients is the firm foundation on which to build the business. (All other ground is sinking sand.)
We insist that our clients be transparent with us about their financial information, because it allows us to quantify the return on investment they are receiving from investing in us. We always want to be able to answer the question: “Why are you worth the fees we are paying you?” We can – you should be able to also.
Indeed, if you’ll give us the answers to the 7 questions listed below, we’ll model it out for you and quantify the ROI available from improving client retention levels:
- How many clients do you currently have?
- What is the average annual profit contribution per client?
- What is your current annual rate of attrition?
- What is your average cost of closing a contract?
- How many new clients do you sell each year?
- What is your average annual first year profit in each new account?
- What is the (fully loaded) cost of selling each new client?
You could do a parallel analysis using an actuarial approach. Ask one of your analysts to model out the effect of adding one –year to the average length of a client engagement. Then add two – then three. You’ll be amazed how the bottom line spikes.
So many organizations act as though real growth comes from the next new client they sell. That’s great PR and Boards just love to hear those stories. But relative to sustainable profitable growth, it’s a false promise. Many years ago, one of our clients characterized it this way, “New clients are celebrated in the boardroom, but here, lost accounts are whispered about in the washroom.”
We’ve never forgotten that.
So, e-mail your reply to us with the inputs to the 7 questions above and we’ll return the confidential analysis to you. It could be powerful.
John & Steve