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A friend of mine, who is a partner in a new studio, has to wrestle their client base into line with their business plan. What makes the problem particularly interesting is that the strategy basically means turfing some of their most profitable clients and replacing them with potentially less profitable ones!

Did you catch that casual reference to a "business plan"? Yes, believe it or not, these two partners actually took the time to prepare a business plan with all the trimmings - client, revenue, staff, expense and investment projections (!) What did that exercise gain for them? Well, instant respect from their bank and accountant for one, and more importantly, a clear set of objectives. Since starting up, they've been out there slaying the market, so much so that they are chronically overworked and have had to recut the business plan to account for twice-as-fast-as-projected growth.

Anyway, back to this client base puzzle. The partners bought a custom-designed project management and acounting system so that they could track individual client profitability. A good thing, too, because they recently discovered that their most profitable client is an advertising agency who accounts for 24% of revenues but only 5% of working days, while their least profitable client is a direct client who accounts for 12% of revenues but a whopping 30% of working days!

"Wait a minute," I hear you saying, "there has to be a catch." You're right. Why, if the agencies are so profitable, do they want to increase their direct client base? Well, their agency clients tend to use them as fallback saviours - this means very hurried briefings, drop-dead deadlines and 24 hour workdays which the entire studio gets to do (not just one or two of them). On top of that, the partners are well aware of the risk of losing the business because the agency loses the business - can you imagine being told that a quarter of your revenue just took a walk overnight? These are some of the reasons why they'd like to reduce their reliance on agency clients.

Conversely, their direct clients are easier to manage in terms of deadlines. Also, being direct, there is a greater chance of getting to know the company, building up a true, 'consultant' relationsip, influencing the briefs and expanding the business done with that client.

So what to do, hmmm? Well, this may sound crazy, but if they're that overworked they really should consider some price hikes. After all, being overworked means that clients find them attractive - the demand is exceeding their ability to supply. The way to crank the demand back to a more reasonable level is to discourage the more price-driven clients away with higher fees. They have a great excuse too, with other clients that are way, way more profitable. Okay, so it'll be "how-good-are-we-really?" time when they break the news to that time-hungry direct client, but let's face it, do you want be a cheap studio or a good design studio? "Cheap" is what dtp bureaus are for!

Raising fees for the direct clients is the way out of the conundrum. Any work that is lost from the hikes is made up for with more profitable replacement clients. Take a look at the math: if the price goes up by 50% and they lose half the work from that direct client, they will get 9% of revenues for 15% of working days, plus they have a remaining 15% of time to do work for other clients.

In the corporate world, they call this a "cherry-picking strategy." Focus on the attractive clients and leave the duds for the rest of the industry, simultaneously making money and letting your ex-clients ruin the competition. Of course, if the design was never that good to begin with and they were really succeeding purely on price, then things will get ugly, they'll go under and the average quality of design will go up - business is very Darwinian.

And it doesn't hurt to let your more established clients (ie. after they flip over the first project) know about your 'rush' rates. Believe it or not, most clients are willing to admit that getting an entire team to work around the clock is worth more than the same team working more relaxed hours. The trick is advance warning, so that the client can factor in the full cost of crunching the project at the time when they are making final adjustments to the budget. One client I used to have knew exactly what the "rush" factor was worth, and still continued to commission projects regardless. Saying "that'll be 100% more" in a matter-of-fact tone before discussing whether or not it is possible is a great way to test your client's time management carelessness. Either way you win - if the project gets crunched you get the money (remember those agencies?) or you get better working hours and maybe even a personal life.

So what do your most and least profitable clients look like?

"Very interesting article which puts some objective measurements around the issue of managing client profitability. Would be ineterested in using the statistics stated as a reference and any other similar articles with statistical data. regards

Mark Perry"

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andrew@lam-po-tangcom