Not All Revenue Is Created Equal: Classifying and Prioritizing Client Tiers
By Marc Gericó
October 31, 2022 | 5-minute read
Client Services External Client Communications and Feedback Project Management Content Type Article
Recently, a law firm in London shared they had increased their client retention rate by more than 40% in the last year. One of the changes implemented after the pandemic was the assignment of a partner, as project manager, to the top 50 client accounts of this law firm. To do this, they had to perform an exhaustive ABC analysis beforehand.
ABC analysis is a business tool that law firms have been increasingly using to segment their clients based on their value to the business, then offering different levels of services accordingly. Once clients are classified in this manner, firms and lawyers can ensure that they make the best use of their time and resources in serving them.
ABC analysis is based on the Pareto Principle, an economic principle created by economist Vilfredo Pareto. Pareto gained notoriety for stating that most economic productivity comes from only a small part of the economy. A common example suggests that a company gets 80% of its sales from only 20% of its clients.
In the case of law firms and ABC analysis, that 20% would be A-level clients — those who contribute the most to its revenue. Essentially, only 20% of clients are so valuable that the loss of one of them would significantly hurt the business.
The Pareto Principle can be further translated to ABC analysis if the lifetime value of the client is considered, rather than simply reviewing short-term revenues. The relationship between input and output contributes greatly to the lifetime value of clients. And of course, it also forms the basis of ABC analysis by providing guidelines for dividing clients into different groups (A, B and C).
Classification of Clients and Their Qualities
Level A represents your firm's most valuable clients. These are the clients who contribute greatly to your overall profit without consuming too many resources. This category will be the smallest and reserved exclusively for the clients generating the most money.
A-level clients are the most loyal to the brand, meet payment deadlines and hire the law firm on a regular basis. They are regularly asked for their advice, highly valued and appreciated, can give us referrals to third parties and help us maintain the firm’s level of income. This type of client is the one that requires special attention and dedication.
The work plan to better connect to A-level clients includes:
- More client support with enhanced responsiveness and technological resources to facilitate new solutions.
- Greater contact with the client, which means more frequent communications through meetings, newsletters, invitations to events, etc.
- Enhanced penetration in the client's network of contacts. Relate to them and meet the maximum number of people from within the company.
B-level clients have great potential. Members of this category can, with some encouragement, become A-level clients. They do not meet some of the above requirements and their purchases are irregular and minor. However, B-level clients are the ones who a priori can dedicate a certain volume of resources to, because they have significant purchase potential.
C-level refers to the hundreds of small transactions that are essential to profits but do not add much value to the firm. This is the level at which most of the clients of firms that do not sell high specialization will live. With these clients, firms should strive for efficiency, optimal delegation to lower-skilled employees and automation of repetitive processes to reduce overhead.
The main utility of ABC analysis is to improve the ability to deal with large and complex data sets — such as turnover contributed by each client or its growth rate — by breaking them down into three segments: A, B and C. These segments define the priority of the data within each area.
Once the information is broken down into segments, it is easier to focus on the data and use it in a meaningful way. Breaking down the information into these segments makes specific issues in the data more obvious and also helps in prioritizing the different segments.
For example, ABC analysis can be used to segment your clients and break down client-specific data. First, you should divide the clients into each of the three categories based on the sales volume the client provides. Then, consider how that volume relates to your margin contribution.
If you segment the clients successfully, clients with the most value will go into the high priority category A, while less significant clients will be placed in the bottom category C. Clients that are somewhere in between will stay in category B.
Segmentation allows you to pinpoint your most valuable clients. It then allows you to examine them separately so you can develop an action plan. When you can look at things in three different categories with a built-in prioritization structure, it is easier to allocate your resources in a more strategic way than when you are trying to make sense of raw data and craft a one-size-fits-all approach. The benefit of taking this extra step is that it makes it easier to analyze the data strategically, which in turn makes it easier to maximize your profits.
Not all clients are the same. They do not all generate the same contribution to the bottom line, nor do they all have the same potential.
Ask yourself two questions:
- What makes a client attractive to my law firm?
- What makes our client relationship strong?
Pretending to serve all clients equally can create expectations of care that in practice cannot be met. We can adapt the level of client care depending on the type of resources and whether the client is sufficiently profitable or not. This is why it is important to carry out a classification of clients, because it allows us to identify the different types of clients in order to provide a service that is appropriate to their characteristics.
Law firm partners should increasingly be improving their skills, not just as project managers, but rather as key account managers. This entails having permanently updated data that allows them to make better decisions for their most important clients. In addition, it presents an opportunity to work on the continuous relationship with them, understand their industry, their business and offer new, innovative and efficient solutions to their day-to-day legal challenges.