01 Oct Are You Over-investing (In Acquiring New Clients)?
Are You Over-investing (in Acquiring New Clients)?
Probably. At least if you fit the pattern of most service management companies we encounter. The notion that growth comes from the next new client you sell is fallacious, that is, if your client retention house is not yet in order.
It can be a useful and eye-opening exercise to really drill down into the economics of selling new business. If costs are fully loaded, you’re adding up your sales department budget and the piece of the marketing budget targeted to acquisition. Add to that the time and travel of operating personnel who must assist, and time devoted by analysts and senior managers to approve and support the process. All for a new client that probably costs a lot to implement and open and one where your early margins have been ruthlessly squeezed by competitive pressure. Of course, these costs exist even for the prospective clients who come down to the wire and pick the competitor. (If your closure rate is 50% – and that’s pretty good – then you can double the acquisition cost, on a per client acquired basis!)
I remember specifically asking a prospective Tenacity client if I could meet with their VP of Client Retention (I knew they didn’t have such a position, but the point was meant to be illustrative).
She: “Oh, we don’t have one of those.”
Me: “Really? You have a Sales VP though, right?”
She: “Well, of course, but our operators are responsible for retention.”
Me: “Oh, I would have thought their job was running the operation, ensuring client satisfaction, meeting revenue and profit forecasts, hiring personnel, etc.”
She: “Well, retention too!”
That’s a full job description, especially since operators are also pulled in to support new business activities all the time. Really, why wouldn’t there be a dedicated retention executive – particularly if you believe, as we do, that profitable growth comes from the following three core activities:
- Retaining the clients you already have
- Increasing revenues and profits from those clients (organic growth)
- Selling new clients …
and, that they are listed above precisely in order of priority. Why wouldn’t you have someone totally devoted to (and measured by) improving client retention?
You’ve heard the facts before, mainly, because they’re true:
- It takes 3 – 8 new clients in any given year, to replace the profitability of one mature client that is lost.
- A one-percentage point improvement in year-over-year retention, generally translates in to a 5% – 8% increase in NOI, without changing anything else in the model.
- The client that you saved this year, that otherwise would have been lost, performs like an annuity – the profits keep coming back year after year.
We urge our clients to look at their investments in new business acquisition and consider reallocating a significant portion to formal programmatic client retention. It almost always pays off bigger, better and faster. (By the way, we know where you can get help with that.)
John & Steve