It’s one thing to understand your firm’s Pareto, but it’s another to execute on what you discover.
To clarify some terminology:
One interesting point that some of our CPA clients have raised is that when you terminate a batch of loss-making clients, your breakeven price will increase, and you’ll find clients that were previously in the Danger Zone now drop into the Insanity Zone. In other words, clients that were previously profitable are now loss-making. That’s because the costs that the clients you terminated were absorbing now need to be absorbed by the remaining clients.
Many accountants use this rationale to justify keeping the new loss-makers as clients. We don’t think this is smart if you’re pursuing a Target Clients only strategy.
Clients in the Danger Zone (whether they are still there or have dropped into the Insanity Zone) can be the most difficult to serve. They are probably small, place high demands on your time (remember, some of them probably landed in the Danger Zone because you raised their price by promising more contact), only require low level, once-a-year compliance services, they may be uncooperative, or your systems and processes are not well suited to them.
The key point is that clients in the Insanity and Danger Zones are certainly consuming resources that could be better deployed if you could find more target clients and as long as you continue to serve them, you will not have time to position your firm to attract target clients.
In other words, it’s a never-ending game where your goal is to consistently upgrade your client base… AND your team, so that they can handle more target clients. That’s why you should be recruiting and marketing all year round.
Food for thought as you start to think about how to stop the madness, so that next tax season is very different from what has happened in the past.
For now, consider how Pareto for Profits and Targeting the Targets can apply to your firm.
The saying also applies to pricing.
The biggest threat we have is not allocating our time, people and capital in ways that will create the most value for key stakeholders.. resulting in more success.