How a Core Relationship Strategy Can Help You Increase Profits
One secret to the success of many professional service firms is treating their business relationships the way that investors treat their stock portfolios. Successful investors look at the investments in their portfolio and decide which ones to buy more of, which ones to hold, and which ones to sell. You should do the same with your business relationships, and this article will show you why and how.
Are You Having Relationship Problems?
Many Web Designers/Developers share a number of frustrations when it comes to their business relationships:
- Spending too much time with "problem" clients: those that don’t pay, are difficult to work with, and are classic pains in the neck to serve.
- The challenge of turning one-time clients into ongoing sources of revenues and referrals.
- Failing to extract the most revenue possible from "good" clients by converting them into "great" clients.
- Spreading themselves too thin among many clients — some good, some bad, and some mediocre.
- Experiencing the pain of seeing other Web developers or designers encroach on what they thought were their "exclusive" clients.
- Going after numerous referral sources, but without hitting any "home runs" with one or two great referral sources.
A core relationship strategy solves the above problems.
Build A Core Relationship Strategy
A core relationship strategy allows you to focus 80% of your time on the few (20%) relationships that can help you reach 80% of your financial goals. It also means that you systematically move past — or even gracefully "fire" — the clients and referral sources that take up too much of your time, for too few returns.
To many readers, this strategy may seem counter-intuitive. Why would you focus primarily on only 20% of your business relationships? Isn’t any client or referral source valuable?
The answer, for anyone who has been in business for a while, is a resounding "No!" Not all business relationships are created equal. Some generate huge revenues without much work on your part. Others make you feel like you’re squeezing water from a stone, and require enormous nurturing and work to extract even a small amount of value.
You will be much more successful when you learn to evaluate different types of business relationships, and then focus effectively on those that offer the highest potential.
Here are the reasons why the 80/20/80 rule makes sense:
- You spend less time to earn more money, because you focus in on your highest-potential relationships and stop wasting time on the ones that won’t help you as much.
- You develop deeper relationships with your strongest clients and referral sources, and will likely get more satisfaction from your work as a result.
- You’ll find that you have been leaving money on the table with many clients, and that a bit more attention will net you significantly more revenue per client.
- You become a trusted, strategic advisor to your clients instead of a mere vendor, so they share information and problems with you before tendering projects out to others.
- You work with your most desirable clients, while gradually eliminating the "troublemakers."
- You get the satisfaction of sending your most annoying clients to the competition!
This strategy may not be appropriate in a couple of situations. When you first start out, and have plenty of room in your pipeline for new clients and relationships, a core relationship strategy may not seem to make sense. This is especially true if you are hungry for cash to pay the bills. However, the sooner you can learn to separate high-potential relationships from low-potential ones, the faster you will grow a profitable business.
Also, this strategy applies specifically to professional service firms. If you sell products primarily, you still want to know who your best customers are. But different techniques, outside the scope of this article (e.g. reward programs, sophisticated database analysis, applications to personalize offerings a la amazon.com), will apply to keep them loyal.
A Five-Step Process
A core relationship strategy involves five steps:
- Develop criteria for ideal and nightmare business relationships.
- Rank your relationships.
- Focus on the core.
- Fire the bottom.
- Watch the middle.
The remainder of this article will walk you through each step. It will start with clients, but you can apply the same process to referral sources and other business relationships (vendors, strategic partners, and even contractors/employees).
Ready to begin?
Step One: Develop Criteria
The first step is to develop a set of criteria to define your ideal and nightmare client (or referral source, or other business relationship). Here are some common criteria to help you do this:
- Short-term revenue and profit potential (within one year).
- Long-term revenue and profit potential (beyond one year).
- Fit with your personality style.
- Fit with your target market.
- A budget for your services, and willingness to pay.
- Fit of their needs with your skills and capabilities.
- Their willingness to push the envelope and do interesting work.
- Risk to you if a project fails.
- Upside to you if a project goes well.
- Visibility of the client and their projects.
- Opportunity for you to develop new skills.
- Opportunity for you to develop a new, marketable product or service.
The above list is not comprehensive, and you should think hard about your own criteria.
When you complete the criteria, get as specific as you can. That way, it will be easier for you to identify high-potential clients, and rank your client list. For instance, your ideal client criteria might look something like this:
- Short-term profit potential of $15,000.
- Long-term profit potential of $100,000.
- Company is an emerging technology venture.
- Company understands the value of a dynamic Website, with cutting edge ecommerce functionality.
- If a project fails, the company takes their share of the blame, is unlikely to take legal action, and the media will not report the story.
- If the project succeeds, it will be widely written about in the industry press, lead to speaking engagements, and the client will provide numerous referrals within and outside the company.
- The client will challenge me to remain on the leading edge of Website design techniques and tools.
- Working with the client will allow me to develop an ecommerce platform that I can market to others.
Company matches my values of hard work, risk taking, and creative thinking.
You can do the same exercise for your nightmare client. In this case, when you think about short-term and long-term profit potential, ask a different question:
What is the minimum amount of profit (or revenue) I would need to earn in order work with this type of client?
That way, you will be in a position to negotiate the kind of income you want in order to make such a client worth your trouble — or to simply say, "No, thank you."
Note that it is rare to find a client that meets all of your ideal (or all of your nightmare!) criteria. Therefore, it is also important for you to identify the criteria you value most.
For instance, I am at a point in my life where making money is key for me. Also, I have learned a lot about how to work with difficult clients by setting boundaries and being flexible and resilient. And I’m focusing primarily on emerging growth companies, which by definition excite and challenge me. So I rank clients by one and only one criteria: how much money they can bring me in one year’s time. If money isn’t your primary motivator, you may have to take more time to weigh the trade-offs of different criteria.
Step Two: Segment your List
Once you have a good list of criteria, you should list all your clients and rank them in terms of their potential for you in the coming year. Don’t worry so much about where they fit now. Think about their potential value to you in the next year or two.
To give an example, I worked with a healthcare technology company that went through this exercise. In its market, the company had previously gone after 5,500 prospects, and had 125 clients. After completing the Core Client criteria (using Step One, above), the owners narrowed their market down to 25 organizations that they would pursue going forward. Some were current clients and some were not, but they all met the following criteria:
- The potential to generate at least $1 million in revenue in the next year.
- The company had an existing relationship with them of some sort or another (e.g. client, ongoing contacts, prospecting meetings, a relationship with specific individuals from previous jobs), so that trust was already established.
- A visible position as a respected organization, and one that would be an excellent reference.
- Significant pain in areas where the technology company could help.
The company also noticed that 75% of its current clients did not meet these criteria! This was eye opening for the company and, as you will soon learn, its owners had to make a difficult choice about how best to handle these clients.
Step Three: Focus on the Core
Once you create your list, the next step is to develop a plan to reach out to, and build your relationship with, the top 20% of the prospects/clients on your list. For each potential core client, answer the following questions:
- What do we need to know about the prospect’s or client’s core business, clients, and issues, and how can we get that information?
- Who do we need to know at the organization to build the relationship?
- How can we strengthen our relationship with these people?
- If we have done business with them before, what was the value to them? Do they know it?
- If we are doing business there now, what needs to improve so that we can strengthen their perception of our business? How will we make amends for any mistakes?
- What do these people value, and how can we help them get it?
- How often should we contact them?
- What are the ways we can stay in touch that add value (e.g. sending articles, inviting to seminars, providing complimentary advice)?
- What are the business goals, problems, and top initiatives of the potential client organization, and of the key people there?
- How can we help them achieve those goals?
- What sorts of opportunities are likely to move forward, what are those worth, and what is the timing?
- How can we communicate our value in a way that will build the relationship?
- How can we communicate our value in a way that ties directly to THEIR goals and opportunities?
- What do we propose first, in order to strengthen our position there, or get an initial foothold?
- Who does what, by when?
- How often should we reassess and update this plan?
I’ve facilitated retreats with executives at small and huge companies alike to answer the above questions and build a relationship plan. It always amazes me how little most professionals know about their client’s business, key people, and initiatives. You can get the basic information by visiting their Website and doing an Internet search.
You should also get comfortable taking key people at the client out for lunch, and asking them questions about their business and where it’s going. In fact, I’ve found that if I tell a prospect or client that I’m building a plan to better serve them and strengthen the relationship, they are often flattered, pleasantly surprised (not many people have the discipline to do this), and willing to give you more information.
Step Four: "Fire" the Bottom
Just as an investor sells losing stocks and bonds, so you should fire (gasp!) clients that come close to "nightmare" status — especially if they are unwilling to pay you for your trouble.
You might also consider firing clients if they’re giving you work that has become tedious, is holding you back from taking your capabilities to the next level, or that simply isn’t in tune with your current aspirations and goals. The fact is that every professional firm evolves over time. At some point, you have to gracefully move on — even if it means leaving behind clients that used to be good to you.
There is a right way and a wrong way to "fire" clients. Ideally, you will gracefully and gradually part company. But if that’s not possible, the right way is to sit them down, explain diplomatically why you need to move on, and suggest to them some resources that can help them. What better way to help a difficult client than by referring them to a competitor?
In the case of healthcare technology firm described earlier, the business owners found that 75% of their current clients did not come close to meeting their ideal criteria. They made a bold move, and wrapped up their consulting work with all of these clients as soon as existing contracts ran out. They only entered new contracts with these organizations if they were highly profitable.
At the same time, they dedicated the majority of their resources to strengthening relationships with core clients. This included incentives to executives who made inroads with the prospects and clients on the list. Guess what? As a result of this approach, they decreased their number of active clients by 50%, and increased revenues by about the same amount!
Step Five: Watch the Middle
The most difficult part of your list is the middle: the ones that are neither your best nor worst relationships. I suggest that you consider clients in this category to be the equivalent of a "watch and hold" stock. Serve them well, and see if you can convert them to a client that meets more of your ideal criteria. Focus your attention on your core relationships, but don’t abandon the revenue and goodwill that comes from the middle of the pack.
Apply this Methodology to ALL your Relationships
The above steps were applied to clients and prospects that could become core clients. But these steps apply to all of your business relationships. For instance:
- I’ve found that, by focusing on a few great referral sources rather than many mediocre ones, I’ve tripled my revenue from referrals. This has happened by learning how to bring more value to my referral sources and help them make more money. In return, they have rewarded me handsomely with more business.
- Some of my vendors and contractors are terrific, and some are poor. But until I systematically ranked and evaluated them, I tended to tolerate lousy service. Now I know which ones to fire, and which ones to reward with my loyalty and trust. And, because I’ve done this, the best vendors — most of whom are in demand — respond more quickly to my requests. (Note that major companies like General Electric and Ford have implemented this strategy and found tremendous cost and quality improvements as a result).
- In the case of salespeople, maybe two or three out of ten are superstars, and the rest are mediocre or duds. The above methodology helps me to keep the superstars happy, while weeding out the others.
Start Today and Repeat Each Quarter
Big and small companies alike have benefited from this core relationship strategy. Start today by identifying your ideal and nightmare criteria, and ranking your relationships accordingly. Or, if you have trouble identifying your criteria, rank your relationships and think about what the top of your list has in common.
Then, repeat this exercise every quarter. If you do, you’ll find that your marketing and sales efforts get easier, because you spend less time on a few outstanding companies.