Attrition Costs More Than You Think!
Attrition is costing your firm much more than you realize and is easy to rationalize as a cost of doing business. To compound it, most professional service firms spend very little to mitigate attrition and improve loyalty. Below are some principles that will help improve your firm profitability.
One of the best books on loyalty and the key factors that YOU should be focusing on is The Loyalty Effect, written by Frederick Reichheld from Bain Consulting. In this book, he analyzes many industries and companies to better understand the inherent costs of attrition and provides several new ways to look at the lifetime value (LTV) of your client.
In The Loyalty Effect, Reichheld maintains that a "5% increase in the retention rate can increase the lifetime value of a customer by as much as 75% in such industries as insurance, banking, and auto service." While I struggle with the math to support this, each of the principles that he provides and factors to focus on make logical sense. He also maintains that higher loyalty rates result in lower price sensitivity and lower costs of service, which makes sense.
For the accounting industry, two factors to focus on for improved profitability are improving customer loyalty and higher employee retention. How many times has a Staff Accountant in your firm departed with several clients in hand? In retrospect, could this have been avoided? Could the needs of the Staff Accountant have been addressed in advance of their departure? Could the client relationship have been structured differently to improve your firm's odds of retaining the clients? Worse yet, did their departure come as a total shock to you?
If you proactively monitor customer and employee satisfaction levels and take steps to address their issues, your retention rates will improve and your constituents will become more loyal to your firm. To proactively diagnose customer loyalty and employee satisfaction issues, many lead edge companies conduct market research surveys on a regular basis. These instruments may seem like a waste but they can be vital to improving your retention rates and firm profitability. The cost to measure customer satisfaction and employee satisfaction are cheap compared to the consequences of losing business clients and churning more employees.
If you have loyal customers, several things happen:
- Retention rates go up
- Referrals go up
- Loyal customers spend more because they purchase more of your services
- Costs to service loyal clients go down
- Initial processing costs go down
- Acquisition and marketing costs decline as a percent of firm revenues
- Profits go up
In the cost to service area, Reichheld points out that the costs to set-up a new customer are significantly higher than servicing an existing client. For example, software customers call technical help more in the first sixty days than the next sixty-day period. This phenomenon works with mortgages, internet services (ISP's) and insurance. Accounting clients are no different. The cost to service an accounting client in year two is less than year one and tend to decline with the length of service as both the client and accountant work together over time.
After illustrating why you would want to improve customer and employee loyalty, Reichheld researches the types of customers that are more loyal and the strategies that large companies use to target customers that are likely to be "more loyal." The examples range from MBNA's strategy with affinity credit cards, USAA with active duty military personnel, Lexis, and more.
Reichheld goes on to say that getting the right customers is only the first step. The next step is to use superior profitability that results from having more loyal customers to hire and retain superior employees. Clearly, employees are key to having loyal customers across all industries, particularly in the accounting industry.
Clearly, Reichheld's Loyalty Effect book is well worth reading and illustrates the importance of retaining your valued employees as well as most of your clients. Before one of your partners walks out the door and down the street with many clients in hand, I would suggest that you pick up a copy this book. At Amazon.com, it's less than $5.00 for a used copy which sounds like a great investment to me.
Here are ten tips to improve your firm retention rates:
- Survey your client's loyalty and satisfaction regularly - With online market research tools, it's easy and inexpensive to solicit feedback from your existing clients.
- Develop action plans to address their concerns. Understand your client's pain - Seek to understand their business issues.
- Be consistent in your approach and interactions. Avoid surprises.
- Follow through on your commitments and proactively manage their expectations.
- Connect with them. Use tools like Act to profile them and aid your memory.
- Hire and retain the best employees. Survey employee satisfaction levels and proactively address issues. Overpay the top performers.
- Position yourself as a resource for life - Position yourself as a life long tax coach or business development coach. Become their trusted advisor.
- Become a thought leader for your clients. Expand your knowledge and share it with your clients.
- Develop an industry niche. Expand your knowledge of an industry and use this to differentiate your practice. Become irreplaceable.
- Illustrate your value - To ensure that the value of your services always exceeds the cost, ensure that you take the time to illustrate the value of your accounting services. Incorporate this into your day-to-day operations.