Building a business in your sweet spot.
You are no doubt familiar with The Pareto Principle,
the concept introduced by Vilfredo Pareto in 1906 when he observed that
20% of the people of Italy possessed 80% of the wealth. In the 1930s
Dr. Joseph Juran termed the concept the "vital few and trivial many,"
the principle that 20% of something-the vital few-are always
responsible for 80% of the results: 20% of the roads get 80% of the
traffic; 20% of your staff provides 80% of the headaches; 20% of the
time produces 80% of the results. And of course, as we see in this
industry, 20% of the clients produce 80% of the revenue.
But this concept, as well proven as it may be, does
not have to be accepted. In fact, I challenge you to refuse the 80/20
Rule in your practice. Don't allow 80% of your clients to be outside of
your sweet spot. And don't allow 20% of your clients to subsidize the
other 80%. Imagine what your business could be if you focused your
efforts-your time, resources, staff, marketing, client service-on the
clients within your target; but instead of those clients comprising
only 20% of your client base, they comprise 80%.
The Impact Of Reversing The Pareto Principle In Your Business
In The 2004 FPA Financial Performance Study,
sponsored by SEI Investments, we found that in fact the firms that had
a larger number of clients within their defined target market far
outperformed those that had a small number of clients within their
target market, regardless of what the target market was. Figure 1
illustrates the average revenue (the yellow bar/left axis) and the
average pretax income per owner (the red dot/right axis) for those
firms that had more than 80% of their clients within their defined
target, and those that had fewer than 20%. The results are dramatic.
You might assume that this is an issue of the client
profile-perhaps these high-performing firms are focused on wealthier
clients? In fact, no. To isolate the impact of client size from the
ability of a firm to focus on clients within their target, we looked at
the firms that were focused on smaller clients but had more than 50% of
their clients within their defined target. These firms outperformed the
firms that had larger clients but only 35% of their clients within
their target. Their target and actual client base comparison looked
like what you see in Figure 2 (page 52).
And their financial performance looked like what you see in Figure 3 (page 54).
Defining Your Target Client
Your target client is one critical element in your
Mission Statement. Your Mission Statement (or your 30-second elevator
speech) states:
"We do [this] for [these people] in [this way that makes us unique]."
Very simple. But "We provide investment management to high-net-worth
clients with a great client service approach" doesn't cut it.
Neither does "We provide life planning to the wealthy on a fee-only
basis." Be as specific as you possibly can. Allow yourself to define a
target that would leave some people outside the target; that would
force you to say in some cases, "No, that prospect is not within our
sweet spot."
To do this in your practice, follow this sequence of steps:
1. Envision what your business will look like five
to ten years down the road. What is your personal definition of
success? How will your practice be differentiated from every other
practice in your marketplace?
2. With that long-term vision in mind, think about
the clients you currently have who are aligned with that specific
vision of the future. These may or may not be your current favorite
clients, but they will be the ones who will have needs, interests,
demands and personalities aligned with the business you want to have.
. Then identify the common characteristics of these
clients who are in the sweet spot of what you want your business to be.
Create a grid with clients on one axis and characteristics on the
other, such as: source, age or other demographic, marital or family
status, background, profession, income, wealth, delegation propensity,
philosophy, personality, concerns, unique needs.
4. Identify where there is overlap in these characteristics. What do these clients have in common?
5. Consider where you can find more clients that
have those specific common characteristics. That is how you will
replicate the clients you have that are within your sweet spot, given
your desired vision of your business.
My favorite example of this is of an advisor I met
in southern California last year. I wish I had gotten his card so I
could give him due credit for what is the best, most specific target
market I have ever heard defined. We were having lunch with a group
after a presentation, and we were chatting about the need to define the
sweet spot. And this gentleman said, "Yes, we have done that. We only
work with clients who have large dogs and RVs."
I paused for a moment, to figure out if he was
serious or not. Then I asked him to elaborate. He said, "We did what
you told us to do. We envisioned our business five to ten years down
the road, and we thought about the clients we had that were most in
line with that vision. What we figured out was that the clients we
liked working with the best, and who were best aligned with our
business strategy, all had large dogs and recreational vehicles. Now
that's all we work with." As we discussed it, the common
characteristics of these clients became very clear. As a
generalization, of course, people with large dogs may tend to be family
oriented, low maintenance (these aren't high maintenance lap dog
people), they like to spend time outdoors. People with RVs may also
tend to be family oriented (they enjoy one another's company enough to
spend long spans of time in tight quarters), they have enough money to
take the time to travel around the country, they have a sense of
adventure but are not cliff-divers, they are down-to-earth and easy
going.
This decision about your target client-in line with
your business strategy-will drive many other decisions in your
business:
Where do you go to get clients? How and where can you replicate the clients within your sweet spot?
What do they need? This will drive your product and service offering.
Who do you hire to work with them? If your target
market is trapeze artists with intergenerational planning needs, you
aren't going to hire actuaries in business suits to be their planners.
In fact, this decision about your long-term vision
and your target client will drive all the tactical and resource
decisions in your business. Every opportunity you evaluate and decision
you make will be made through the filter of, "Is this
opportunity/hire/strategic alliance/vendor/product/service I am
considering going to be meaningful to the clients in my sweet spot, and
is it going to move me closer to my vision of my business in the
future?"
One of the mistakes that advisors make is to assume
that strategy is the same as marketing. In reality, marketing is a
subset of strategy. A strategy helps you to make decisions about how to
spend your resources of time, money, management and energy. Part of
this is on marketing, but much of this is on the client service
experience.
With the cost of doing business rising faster than
revenue in many firms, a focused effort allows you to build more
efficiency into how you deliver what you do. As in the example above,
if your strategy revolves around wage earners, then you can scale your
service offering, technology and hiring of staff to that market. If
your strategy revolves around business owners, the client service
experience and investment in infrastructure will be much more
substantial, and the time you spend with those clients will be greater,
therefore justifying the higher fees.
You can relate to this in everyday life. If you go
to Costco, you are not seeking a warm and fuzzy shopping experience but
rather the ability to purchase a year's supply of toilet paper at a
competitive price. If you go to Barney's or Nordstrom, you won't even
find TP in quantity; they transform the paper into wrapping, packaging
and bags for you to carry your items out of the store. A different
experience.
The Danger Of Diversification
I know that even if any of you were not familiar
with The Pareto Principle, you are familiar with the concept of
diversification. Forget everything that you know about diversification.
While it is a sound and fundamental concept in investment theory, it is
a recipe for distraction in an advisory firm. Until a firm is dominant
in its target market and has resources to spare, they do not have the
resources to diversify. If a client came to you with $1,000 and asked
you to create a diversified portfolio, you would tell them, "You don't
have enough resources to diversify." The same is true with
advisory firms. Focus you resources on your sweet spot-the defined
market in which you want to make an impact.
In fact, if you think about it, diversification is a
defensive strategy, not an offensive strategy. As within investments,
the primary reason one diversifies is to manage risk. It is difficult
to win on defense alone. The question for you is, what will propel your
business forward-where's the point of the spear? When you combine a
strategic focus with appropriate defensive tactics, you build a better
business model. So your current client base may represent your
diversification effort; your future client base within your sweet spot
will represent where you are going to grow. A good metric to observe
each year is what percentage of your clients is in your sweet spot, and
is that percentage growing.
What To Do With Clients Or Prospects Outside Your Target
Core to focusing on clients in your sweet spot is
being diligent in your client selection process-both for new clients
and ongoing relationships. There are two schools of thought on whether
or not you should fire clients who do not fit in your target. I have
seen either option work effectively. Many firms have to release at
least those clients that are outside their target with no hope of ever
being inside it. Remember, you only have 20% of your client base
available to dedicate to nontarget clients.
The same goes for prospects. Most advisors will
argue that they can't turn away a prospect from their best client-the
client's child (or even the client's aunt's hairdresser, which was an
argument I was faced with once.) At the beginning of each year or
budget cycle, you need to budget how many nontarget clients you will
accept in a year. If your goal is to bring on 40 new clients in a year,
only eight of them (20%) can fall outside your target. And that is
assuming you don't need to overcorrect with new clients to compensate
for old clients outside your target who you don't want to let go of. A
prospect that you expect may one day qualify for your sweet spot still
counts as one of the 20% nontarget clients your budget limits you to.
Certain prospects and clients always need to be on the "no" list. Say no to:
A lone client who asks for something outside your competency
Clients who ask for a discount-don't work with anyone who doesn't value what you do
A financially attractive prospect who doesn't fit your competency or philosophy
Bad, rich clients who abuse you or your staff
Offerings your sweet spot clients don't care about
Don't accept as gospel that it is acceptable to have
80% of your clients outside of your sweet spot. Decide to build a
business where 80% of your resources are focused on the "vital many"
who generate 80% of your results, instead of letting the "vital few"
fund the "trivial many." Your clients and your business will thank you
for it.
Rebecca Pomering is a principal in
Moss Adams LLP and consults with financial advisory practices on
matters related to strategy, compensation, organizational design and
financial management. She is co-author with Mark Tibergien of Practice
Made Perfect.