Your firm’s ability to retain clients is one of the most important components to sustain growth and profitability. Here are the three retention questions every accounting firm should be able to answer:
What percentage of your clients return each year?
The first step to understanding retention is to know your client retention rate. First, take your total clients from the end of a period and subtract the total clients you added during the period. Then, take that number and divide it by the total clients from the start of the same period. The result is your retention rate for that period. That rate by itself doesn’t tell you much, so you need to compare it to the same time period last month and for prior years. A rising rate means you are on the right track; a shrinking rate means you need to make changes. According to the Harvard Business Review, a 5 percent increase in your retention rate increases profits by 25-95 percent!
Example: AB&C Tax Firm starts the year with 700 active clients. They add 300 new clients during the year, and their active client base is 800 at the end of the year. On the surface things look good, right? This increase of 100 clients is over 14 percent! But when you calculate the retention rate, it is 71.4 percent (800 clients minus 300 new clients means 500 of last year’s clients still use AB&C. And 500 divided by 700 equals 71.4 percent). But AB&C doesn’t know if this is good or bad news, as it only makes sense when comparing it to the last few years’ retention performance.
What percentage of your revenue comes from returning clients?
Core clients almost always contribute the most to your profitability. But how much? To figure out your returning client revenue percentage, start with a list of revenue by client for the last 12 months. Identify the returning clients and add up revenue attributed to them. Divide that number by your total revenue. Use this information to balance your spending between new client acquisition and retaining your core clients. If you are like most businesses, you will realize there is tremendous value in spending more time and effort on retention, even when your business is full!
Part 2 AB&C Tax Firm Example: Assume AB&C’s total revenue is $1 million and the revenue from the 500 returning clients is $900,000. In this case, the core clients represent 90 percent of the revenue but only 62.5 percent (500 divided by 800) of the clients!
Do you know who your most valuable clients are?
Now identify which clients spend the most and buy the most often. Odds are, many of your top clients have similar characteristics. In the end, your goal should be to keep these clients happy and get more just like them!
Part 3 AB&C Tax Firm Example: In the example above, the average revenue per client is $1,250 or over $100 per month ($1 million divided by 800 clients). If the top 20 clients represent $100,000 in revenue or $5,000 per client, you can quickly see how important they are!
Don’t make the mistake of assuming success comes from constantly adding new clients. Most sustained growth and profitability comes from first understanding marketing activities targeted to keep your current clients.
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