“Manage customers for profit, not just sales”, recommended Harvard’s Benson Shapiro in his famous HBR article way back in 1997. Three decades later, many law and accounting firms still haven’t got the message. Yes, revenue growth is really important in firms with high fixed-costs, but paying lip-service to client profitability is a major missed opportunity.

The Client Profit Matrix

Shapiro and his friends offered a useful tool to map your firm’s client portfolio. On the vertical dimension is relative price and on the horizontal is relative cost-to-serve, as illustrated below.

The Q1 Hi Price Hi Cost segment has those clients purchasing new-to-the-world offerings which require senior practitioner input and bespoke processes. It also includes those clients requesting full-service ‘turnkey’ solutions.

The Q2 Hi Price Low Cost segment includes those clients that think the best of you and that really value your services. Q2 also includes uninformed purchasers and unchallenging price-takers.

The Q3 Low Price and Low Cost segment are the bargain-hunters, no-frills and commodity buyers.

Q4 Low Price High Cost include those high-revenue (often labelled “strategic”) clients who leverage their bargaining power and demand value-adds, special services and reporting. It also includes the soul-destroying clients that require an inordinate amount of handholding. The third group, the ‘tail’, are very small clients that barely cover the costs of account establishment and maintenance.

The Power Axis and the Value Axis

Over time, Q4 clients are not sustainable. A special effort needs to made to move these clients closer to the value axis, the blue line in the chart where value is shared roughly equally in the exchange between the firm and the client.

The red line in the matrix is called the power axis. The part of the line in Q2 is where the firm has relative power over its client and bottom right Q4 where the client has more power than the firm.

Transitioning Q4 Clients

There are five broad strategies dealing with Q4 clients:

1.    Reduce cost-to-serve – offer similar client benefits but deliver them at a much lower cost. This approach might include a combination of redesigning delivery processes, switching to lower cost resources, automation and cost-transfer i.e. get the client to do more. The banks’ strategy of shifting basic transactional banking services from retail branches to the web and smartphones is a brilliant example of this.

2.   Service augmentation – create new higher value products and services and charge more for them. Part of this approach is to develop a deep understanding of which specific elements of value are important and tailor the offer accordingly (see this post for more). Branded technology companies are particularly adept at charging their customers premium prices for new models and inventions.

3.   Unbundling – demarcating different product-markets along the value axis and negotiating different prices for each. The Big 4 accounting and consulting firms are quite adept at charging eye-watering hourly rates for their top corporate tax advisors while charging the same clients low fixed fees for commoditised compliance services.

4.   Renegotiating – approaching the client with an open-book and requesting the relationship to be reset with a pricing and cost structure that’s fairer and more sustainable. There are many examples where new ‘co-created’ solutions yield better outcomes for both client and firm, but also strong incentives for long-term efficiency gains and innovation. The Perkins Cole-Adobe model is one recent example of this.

5.   Say goodbye – if all else fails saying, “4Q” to Q4 clients is the best option. Retaining a value-destroying client over time is clearly not in the firm’s interest and walking away is the bravest and smartest thing to do. Gifting soul-destroying clients to your competitors can make you stronger and them weaker. There may be opportunities to transfer Tail clients to other providers better suited to meet their needs, in return for ‘right’ client referrals.

Client life cycles and migration paths

The Client Profit Matrix can also be a useful analytical tool to track client migration paths over time. One theory is that a typical client relationship will go from Q1 ==> Q2 ==> Q3 ==> Q4. At the early stages of a relationship, costs and price are higher as the parties get to know each other. As the relationship matures and other firms start to contest the client’s spend, prices start to drop. Over time, cost-to-serve rises as more bells and whistles are added.

Clearly, service innovation and better value communication are essential in slowing down this maturation cycle and keeping clients in the top-left of the matrix for longer.

The underlying intent of a ‘loss-leader’ strategy is to go quickly from Q3 ==> Q2 or Q1. It is interesting to track how many of the clients, in fact, make that move and what facilitates this migration. One recent example of this comes from Allens-Linklaters who acquired Canva via its low-cost, low-price online Accelerate platform. They recently reported helping Canva to grow to a $1 Billion market valuation.

Doing a longitudinal heat map of the Client Profit Matrix can be a very useful tool to track your firm’s overall strategic health. In the graphic below, one can clearly see the firm is losing ground and becoming weaker over time.

Call to action

Have a go at mapping your firm’s client portfolio. It will reveal your entrenched Q4s and force an honest strategic discussion as to which of the five transitioning strategies to pursue.