follow this simple formula.
by august j. aquila
price it right: how to value accounting services
although most of my posts deal with gaining new clients and bringing in new projects, it’s important to remember that the most valuable asset of any professional services firm is its clients.
more: the secrets of great business developers | how life cycle changes your marketing | clients buy solutions, not features | make sure you know what you will get from your marketing | three pillars support a successful accounting firm | clients have six reasons for needing you | six ways to market your technology consulting practice | sixteen marketing activities to try | the four steps of your personal marketing process
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losing clients can be costly, but do you really know how much it can cost you? let’s find out.
the first step is to track client attrition. be honest with yourself here. it’s important to know how many clients leave each year and why they leave. most clients don’t leave because of fees. there are two main reasons people leave:
- you didn’t spend enough time with them (lack of service/attention).
- they didn’t receive sufficient value for the fees paid.
there is a way to calculate the cost of poor service. here is a simple formula: take the number of clients that you lose on an annual basis and multiply that number by the average gross profits per client, and then add the cost to replace lost clients. the total equals the cost of poor service.
use the following worksheet to figure your cost of losing clients:
| 1 | number of existing business clients | 1,000 |
| 2 | number of clients who leave each year | 50 |
| 3 | number of clients who leave citing poor service | 15 |
| 4 | average annual gross profit per client | $21,000 |
| 5 | multiple line 4 by line 3 | $315,000 |
| 6 | add cost to attract new client | $8,000 |
| 7 | multiple line 6 by line 3 | $120,000 |
| 8 | add line 5 to line 7 | $435,000 |
line 8 is the annual cost of poor service to your firm. you may be surprised to find out how large line 8 is.
here is an example. firm a has 1,000 business clients and estimates that they lose 50 clients a year and that 15 of those clients are lost because of poor client service. average client revenues are $35,000. the average gross profit (gross profit = profit after direct expenses for labor, etc.) before operating expenses was $21,000 per client. the firm was losing approximately $315,000 per year (15 clients times $21,000 gross profit per client).
the firm figured that the opportunity cost and out-of-pocket costs to attract a new client average $8,000. it cost the firm $120,000 to replace those 15 lost clients. the lost gross profit ($315,000) plus the cost of attracting new clients ($120,000) came to a total of $435,0000. this amount represents 6.2 percent of their gross revenues of $7 million and 22 percent of their net income of $1,960,000.
as soon as the firm realized the true cost of poor service, it started to take the necessary action steps to improve its service.
make sure you know what poor service is costing your firm.