Entrepreneurs typically rate their clients by at least four crucial factors: profitability, stability, vulnerability and potential for future business. Let’s look more closely at how you rate clients on each of those factors:
Profitability
This is by far the most critical factor because it ultimately determines the profitability of your business. To be really useful, this criterion needs to give you feedback on exactly how profitable a particular client is on a monthly, weekly or even daily basis. You need to determine whether any project you are working on for any of your clients is profitable. That’s why it’s so vital to know your overhead costs.
You need to know which clients are most profitable, which clients are least profitable and which clients you are losing money on. For example, an A-rated client would be very profitable; a B-rated client would be about average, a C-rated client would be below average, and a D-rated client is currently unprofitable. The challenge would be to upgrade the Cs and Ds to become Bs and As. That can be done by either improving your efficiency in serving them, or by charging them more money or by a combination of those factors. If you can’t do one of those three things, it’s best to cultivate new clients to replace them. But don’t be too hasty.
Stability
A steady client who is slightly below average might be more valuable than a one-shot client that is rated B, or even A in immediate profitability. These are bread-and-butter accounts that help you meet basic expenses and smooth out the times when business is slow.
Consider just how stable each of your clients is. Obviously, clients who are rated A or B on your stability scale would be more valuable than those that are rated C or D. The stability of a client also includes that client’s dependability in making payments. A client who would be profitable if he or she paid on schedule but never pays on time would be rated very low on the stability scale. As you mix the stability rating with the profitability rating, you can see that a picture is beginning to emerge. A client who rates a B in both profitability and stability is a very desirable client.
Vulnerability
What happens to your total business if a client cancels? Advertising agencies and other professionally run businesses are notorious for recruiting big accounts, then staffing up to handle those accounts. When one of their clients cancels, they may have to lay off a fourth—or maybe even half of their staff. Of course, some professions are structured so you can only play by those rules. But the more stable your clients are, the easier it is to manage your business.
It’s usually better to have more clients doing proportionately less of your total volume. Many successful entrepreneurs have a rule that no one client will ever account for more than a certain percentage of their total business. That way, they control their vulnerability. Regardless of how you set your standards, it’s a good idea to rate clients by the vulnerability they create for your business. The greater your vulnerability, the lower the client is rated. The more of your clients you rate as very volatile, the less stable your business is at any moment.
Potential
How much realistic potential do you see for the development of each client? It’s seldom a good idea to hang onto an unprofitable client hoping they someday become profitable. It almost never works that way, and you can go bankrupt while waiting for them to turn the corner. But there are some small clients who have the potential of becoming major clients, and there may be some clients who’ve done business with you sporadically that you might be able to move into the stable column with a little cultivation. But there may be clients who have been steady for many years who, because of their changing needs, are likely to soon become much less stable.
To get a complete picture of your total clientele, you need to rate the potential of all your clients. The key to making this criterion is to be realistic. Don’t rate them by what business you think they’re capable of doing with you, but by what business you can realistically expect to sell them in the not-too-distant future. Most entrepreneurs consider those four factors critical in rating their present clientele. Consider additional factors, like:
- A client’s suitability to your organization’s capabilities
- How a client fits into your cash flow needs
- A client’s prestige in the marketplace
Once you have rated your clients in all the areas you consider important, you can put together a composite picture of each of your clients and come up with a total rating for them. You can also tell instantly how close you are to having the right kind of clientele. Once you have drawn up a profile of the ideal client for your business, and you have evaluated your present clientele, you may need to take strong action to bring what’s real more in line with what you’d like to see.
Building the right kind of clientele is not simply a matter of looking for the right kind of prospects and selling them. It’s an ongoing process of constantly sharpening your internal operations, knowing what kinds of clients you are best suited to handle, and steadily upgrading your client base. If you will do all those things, you can build a solid and profitable clientele—one that will provide security for the long run.
This article was published in February 2008 and has been updated.
Photo by Rido/Shutterstock
