Assuming you want to grow your practice, have you recently given serious thought to your growth options and what they are?
We focus so much on the day-to-day that we often overlook the big picture stuff that is so important to the sustainability of our business. The frenetic pace of business generally and the relentless nature of change in the financial advice industry in particular mean we spend far more time focused on working ‘in the practice’ than we do ‘on the practice’.
That’s why it’s a good idea to occasionally take a step back and review some of the fundamentals that impact strategic outcomes such as practice growth.
To help you get this thought process started, we take a look at the key growth options and identify some important characteristics associated with each.
Essentially, there are two main ways to grow a practice – inorganic (buy) and organic (build). Let’s take a detailed look at both to see which of these options might be the most attractive for you.
INORGANIC GROWTH (BUY)
This type of growth is when a practice engages in mergers, acquisitions or joint ventures, rather than growing through an increase in the practice’s own activities. If you choose this growth option, you may be able to gain access to new markets (geographies, client demographics) and service lines.
As an example, this may involve buying a client book (partial or whole) from another practice where the book provides geographic, demographic and service line divergence to reduce overall practice risk and/or to leverage emerging market trends.
Inorganic growth generally results in an immediately larger market share and possibly new skills and knowledge if additional personnel are acquired at the same time. It is seen as a quicker way for a practice to grow when compared with organic growth options. However, the sudden increase in size can present a number of challenges that increase with the size and complexities of the new client portfolio being created. Client issues are likely to arise, particularly in regard to the quality and future profitability of the client base if the acquisition is not carefully managed.
Here are some key aspects of the client base that should be carefully examined:
- Strength of the client relationships, measured through feedback mechanisms such as client surveys
- Predicted profitability based on historical performance, service utilisation, and client feedback and age
- Client acquisition cost to client lifetime value (predicted profitability) ratio i.e. the cost to acquire the client book compared to the net present value of future profits. Obviously you want to recoup the initial cost as quickly as possible so this ratio is a key metric to evaluate.
ORGANIC GROWTH (BUILD)
Practices that pursue growth from within should first understand that this requires time and patience because expanding the client base through increased share of wallet from existing clients, attracting new clients via marketing activities or referrals needs to be done prudently.
The risks inherent in organic growth lie in expansion that may outpace the practice’s ability to manage, stretching limited resources too thin, straining working capital and diverting effort from the practice’s ability to service its existing clients.
On the other hand, practices that grow organically rather than inorganically get to control the rate of growth and face less integration challenges provided they have a carefully thought out ‘ideal client’ profile and smooth client on-boarding and aftercare processes in place.
Let’s take a quick look at the organic growth options.
Improve Client Retention
The long-term success of your practice relies heavily on client retention because without it, it will resemble a leaky bucket – new clients entering and existing clients exiting the ‘holes’. Client retention is an essential precursor to both increasing share of wallet and generating referrals (other organic growth options – see below).
Due to the relatively ‘sticky’ nature of client relationships in the financial advice industry compared to other industries, client retention rates for well-performing practices tend to sit in the range of 94% – 100%, which means an annual client churn rate of 0% – 6%.
As an example, an annual churn rate of 10% implies an average client lifetime of just 10 years, so assuming each client is profitable, it makes a lot of sense to extend the client lifetime as far as possible by minimising churn. If your practice isn’t consistently achieving high retention rates year on year, then you need to figure out what you can do to arrest the leakage of existing clients (unless of course they are caused by events beyond your control such as mortality, divorce, physical relocation, etc.).
The key benefits of client retention include:
- Opportunities for next-sell, cross-sell and up-sell of products/services that may command higher margins and/or lower cost of service. A number of studies have suggested that the acquisition of a new client can cost 5x – 10x more than maintaining an existing client, so client retention has a positive effect on costs and the bottom line.
- Greater propensity to recommend your services to family, friends and colleagues (referrals)
- Greater likelihood of generating positive ratings, reviews and testimonials that can be used in your marketing activities to attract new clients
- Retained clients may be less price/cost sensitive. A client who is loyal to your practice is more likely to accept a price increase than a new client provided you can demonstrate value delivered.
Increase Share of Wallet
As a primer, share of wallet (commonly referred to as SOW) is a term referring to the amount of the client’s total spend that a practice captures in a product/service category. For example, your share of the client’s total spend on financial advice services represents a share of that wallet relative to your competitors.
Increasing the share of a client’s wallet is often a cheaper way of boosting your revenue and profitability than increasing your share of market because the client is already a client and naturally more open to the possibilities of expanding their relationship with you. Additionally, you have already invested to acquire the client so you don’t need to re-invest to the same extent to sell additional products/services.
Increasing the share of wallet may involve one or more of next-sell (providing the next logical product/service consistent with the client’s changing needs), cross-sell (getting the client to spend more money by adding more products/services from other categories than the product/service being acquired ) or up-sell (getting the client to spend more money to acquire a more expensive version of the same type of product/service, or for added features that relate to the product/service in question ).
Client retention is an essential requirement to increasing your share of wallet.
Increase Share of Market
There are basically two ways to increase your practice’s share of the market (excluding inorganic growth).
Firstly, you could embark on acquiring new clients through marketing activities such as advertising, promotion, sponsorships, SEO, content marketing, social media marketing, etc. This can be a very expensive, time consuming and frustrating exercise with little to show for your investments. This is probably the most difficult of the organic growth options to execute.
Alternatively, you could focus on attracting new clients through referrals. This is the holy grail of organic growth because it leverages your relationships with already happy clients to attract new ones, costs less to execute than trying to acquire new clients by other means, is often a quicker path to growth because the new client arrives semi-sold on doing business with your practice and the new client is likely to be ‘stickier’ earlier.
This is why so many practices regard referrals so highly and rely on them for 90%+ of their new clients.
Other forms of referrals may involve leveraging so-called ‘Centres of Influence’ or other businesses that operate in adjacent markets.
Issues that need to be carefully considered to generate referrals include:
- Identify your strongest client relationships, measured through feedback mechanisms such as client surveys – these are the clients most likely to initiate referrals or be open to doing so
- Know and be able to articulate what your ‘ideal client’ looks like so you avoid wasting time on referrals that don’t fit the bill
What are the best growth options for your practice?