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How Can Loyal Clients Hurt Your Business?

Are loyal clients killing your business?

If you read enough business publications, including this newsletter, you will know that loyalty is a highly desired quality in a client. Loyal clients do not leave. Loyal clients cost you less in acquisition costs. Loyal clients continue to do business with you.

So, how can loyalty hurt you?

Clients Are Not Created Equal

Let’s compare two customers from a completely hypothetical bank, Brown Belly Bank. The first customer is Jimbo. Jimbo makes a good salary and owns his own home. On Jimbo’s property is an old in-law quarters that he has converted to a rental. Jimbo has a savings account, a rental account, a line of credit for “rainy” days, and a retirement account. He even has his home and car loans through Brown Belly.

All of Jimbo’s financial transactions are though Brown Belly Bank. He knows the tellers and bank manager by name.

Bambi is also a customer of Brown Belly. Bambi usually has steady employment. On occasion, she loses her job. Sometimes, her employer has financial problems and has to let her go. Sometimes, she just knows it is not a good fit and moves on.

Bambi likes to spend money. She likes nice clothes. She likes to go to concerts. She likes to go to the beach. There is nothing wrong with this of course. It is just that Bambi has not acquired the savings habit. Occasionally, she bounces a check.

What do you suppose Jimbo and Bambi say when friends talk about their bank?

Both Bambi and Jimbo are loyal. Both continue to keep their accounts at Brown Belly Bank. But clearly, Brown Belly would be better served by keeping more Jimbos and fewer Bambis.

How do you account for their difference in value?

Promoters Versus Detractors

Would your client promote you to a friend?

That is the question that Fred Reichheld asks in his book The Ultimate Question: Driving Good Profits and True Growth. Clients who promote you to their friends are promoters. Those who tell your friends to run in the opposite direction are detractors.

Reichheld goes further to actually quantify the value of a client by using Net Promoter Score. The Net Promote Score of a client is computed by measuring:

  • Retention Rate: The length of tenure of the average promoter and average detractor.
  • Margins: Profit per sale made. Promoters are typically less price-sensitive recognizing the value they receive.
  • Annual Spend: Promoters buy more. Consolidating their budget for a specific service or product to a single supplier.
  • Cost Efficiencies: Detractors cost more in increased complaints, they are slower to pay, and more likely to default on payments.
  • Word of Mouth: How many new clients come as a direct result of talking to a promoter? How active are detractors at spreading the anti-gospel?

When you collect the data on these measures, Reichheld suggests that you can tailor your services to encourage the promoters to stay, and encourage the detractors to leave.

Net Promoter Score (NPS) is a useful indicator of the value of your clients, but can loyal high NPS clients kill your business?

Work Within Your Highest and Best Use

Promoters can kill your business when the work you are doing for them is outside of the scope of work you should be doing.

Your highest and best use (HBU) is the answer to the question: Where can I do the most good. It is the application of your natural competence and skill to those who have the greatest need for that competence and skill.

The value of your loyal clients can be expressed in a matrix.

HBU = highest and best use.
NPS = Net Promoter Score.

High HBU
High NPS		 Low HBU
High NPS
High HBU
Low NPS		 Low HBU
Low NPS

 

Low in both NPS and HBU

For Brown Belly Bank, these would be Bad Bambis. This is not a hard decision. Bad Bambis soil your good name and trying to please them will teach you the wrong lessons. Lose them. Fast!

Low in NPS, but high in HBU

Good Bambis. They don’t like you, but doing the work for them could reveal important lessons about the enterprise you hope to become. Perhaps you can turn them to promoters, but it is probably best to let them go and identify lessons learned.

High in NPS, but low in HBU

Bad Jimbos. This is the most dangerous mix! These are the loyal clients who can kill your business. It is easy to want to work with people who like and promote you, and bring you referral business that likes and promotes you.

But if they don’t have you doing or developing your highest and best use, you are ultimately trading value for likeability. Worse, your value to them—as well as their like of you—will diminish over time.

Take good care of these clients. Try to get them well matched with other vendors. Perhaps there is work that you can do for them that is high HBU. In any case, scale down the low HBU work as gracefully as possible.

High in both NPS and HBU

Good Jimbos. These are the best clients for your business. They sing your praises and promote your development as a most valuable enterprise.

Your most valuable promoters engage you in a manner that requires you to do the work you should be doing and/or should be developing a competence in.

The work you do for these clients is mutually beneficial to the highest degree. Loyalty alone is not enough. Make good use of Net Promoter Score within work that is your highest and best use, and your clientele will be full of Good Jimbos.

Happy Client Retaining,

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© 2004-2007 Jeff Simon Consulting. All Rights Reserved. Wouldn't you love to peer into your client's head and know what they are thinking and feeling? Could you have better success at keeping and choosing your best clients if you could decode their behavior? Check out the Happy Clients Newsletter at: www.happyclientsnewsletter.com.

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