It’s a controversial tactic: sacrifice short-term revenue and shed less profitable customers to focus more on high-value ones. But an accountant has said that one business grew by “six to seven times” in just five years by doing exactly this.
George Morice, accounting director at Prime Partners, said that his firm is specialising in accounting services for businesses, and through its services, a number of clients asked for “a deeper level of advice”.
So, he developed those analytical skills further and set to work auditing the operations of his clients and how they could run more profitably.
The revenue ceiling that traps many businesses
According to Mr Morice, there is a distinct ceiling at which point many growing businesses falter. And ultimately, it comes down to the fact its owners are skilled in their particular niche, but not necessarily in running a business.
“They start their business and they’re really good at a product or they have a really good idea, and they build from that. And that’s enough [initially]; they’re close enough and tight enough to build that out to a million or two in revenue,” he explained.
“At that point though, they start to be expected to be experts at business. And that’s not what they’re trained in. They need help with that.”
More clients doesn’t always mean higher profits
The business adviser noted that a larger customer list is not always the path to business prosperity, and in fact, many clients can actually be a drain on profitability.
In such instances, he said it can be beneficial to cut the number of customers or clients, and instead focus on adding extra value to the more profitable ones.
“I guess most people, when they look at their business, they look at the top line — they look at the revenue coming in and they try and grow it. And that is the most common approach. But they don’t look at the bottom quite often,” Mr Morice said.
“They don’t look at the profit at the end of the day, and they don’t look at it from a client-by-client basis.
“One of the things we do with our clients is we look at it and go, ‘What percentage of your revenue is coming from what percentage of your clients?’ I had one in [recently] and 57 per cent of their revenue was coming from the top 3.5 per cent of their clients.”
It was for this exact reason, Mr Morice explained, that he advised another client to get rid of a staggering 97 per cent of its client base, but do so in a way that still brought in money for the business.
“We had one very, very stark — and this isn’t normal — but we had one [instance] where I did the analysis and I sat down really nervous for the meeting with this client, because I was like, ‘They’re not going to love what I’m about to tell them’,” he recalled.
“My recommendation at the end of that was to package up — so not just cut, because we want to make a bit of profit along the way — package up and sell 97 per cent of their clients.
“I was showing them the figures and saying, ‘Okay, if you just got rid of that [bottom] 20 per cent and did nothing — you didn’t sell them, you just stopped servicing them today — your bottom line, your profit will be up by this much’. That’s an easy sell. Do less work, have more money.”
In justifying this approach, Mr Morice said that “we noticed in that 3 per cent [of most profitable clients], there was a real synergy of the owner and what value they could add”.
He said the client took this advice and embraced this top 3 per cent of its customer base, added additional value and encouraged them to make recommendations of similar businesses as potential new clients.
“They built a brand about that specific type of advice, and they built it out to a huge company with highly profitable clients, rather than a medium company with low profit clients that were really high touchpoint,” he said.
The initial reaction to the suggestion to shed clients can be defensive, Mr Morice admitted.
In the above example, he said that his client’s initial response was, “That’s ridiculous! We’ve got rent to pay. We’ve got everything to pay”.
But a detailed strategy was devised on how to implement this change, he said, and the process was staggered over time so as to minimise the short-term hit to revenue.
“It was probably 18 months,” the accountant said.
“And part of that was actually capacity within the firm. So, we sold 20 per cent off straight away — we just packaged it up, found a buyer, sent that off. Then for the remainder, that freed up some time.
“We delegated all of the owner’s work down and sent them out in to the market — advertising, talking, networking with people about what they did really well... that then started to bring in more work.”
As new work came in and filled up the spare capacity, the next tranche of less profitable clients was sold off, and this process continued over a year and a half.
“So, over 18 months, we basically could replace most of their client base,” Mr Morice said.
“The last bit, they were ready to take the leap of faith. They knew that about 30 per cent of their staff would have nothing to do — absolutely nothing. But they had the faith after what they’d [already] done that that [spare capacity] would be filled. They didn’t need to make anybody redundant.”
That process, Mr Morice explained, was completed around five years ago, and that business is now “probably about six to seven times the size than when we first decided to make that cut”.
Check our more insights from Mr Morice on the My Business Podcast.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.