Your practice will never achieve 100 per cent client retention over the medium to long-term.
All of your clients will depart this mortal coil at some point, others will get divorced or separate and still others will relocate to a new country, state, city or town. Some may even leave you because they don’t think you’re doing a good enough job or you charge too much or they feel unloved.
Yes, some churn is inevitable but the ultimate success of your practice relies heavily on retaining clients so you can extend their lifetime value and, ultimately, maximise the value of your practice. After all, at some stage, you will want to achieve a liquidity event at the highest possible valuation.
Retention is also an essential precursor to both increasing share of wallet and generating genuine referrals.
Client relationships in the financial advice industry are relatively ‘sticky’, compared with those in other industries; client retention rates for average to well-performing practices tend to sit in the range of 94 per cent – 98 per cent, which means an annual client churn rate of just 2 per cent – 6 per cent.
If your practice is operating at a retention rate of 94 per cent (with an implied annual churn rate of 6 per cent), what would it mean to your bottom line to reduce the annual churn rate to 5 per cent?
Let’s run some hypothetical numbers using these assumptions:
- Annual retention rate = 94 per cent
- Annual churn rate = 6 per cent
- Average client age = 55 years
- Average annual revenue per client = $5000 (ex. GST)
- Average client life expectancy = 75 years
- You have 100 clients
Based on these numbers, you could expect to generate revenue of $100,000 (unadjusted for CPI) per client over their remaining lifetime (20 years x $5000 p.a.) x 100 = $10,000,000 in total.
The implied average client’s economic lifetime, based on the current churn rate of 6 per cent, is almost 16.7 years. This means that unless you can reduce the churn rate, you will miss out on generating 3.3 years of revenue per client = $16,500 = $1,650,000 in total.
None of these calculations take into account the attractive financial benefits of generating additional referrals as a result of extending client lifetime nor the savings linked to avoiding the costs of marketing activities to acquire new clients to replace those who have left.
As you can see, this is no small deal and when it comes time for that long-awaited ‘liquidity event’, every client you can prevent from prematurely churning has a significant impact on your ultimate pay day.
Client retention also brings other benefits, such as 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 I have seen have suggested that the acquisition of a new client can cost 5-10 times more than maintaining an existing client, so client retention has a positive effect on costs and the bottom line.
Good client retention also means a greater likelihood of generating positive ratings, reviews and testimonials that can be used in your marketing activities to attract new clients.
Also, retained clients may be less price/cost sensitive. A client who has been loyal to your practice is more likely to accept a price increase than a newer client, provided you can demonstrate value delivered.
Assuming each of your clients is profitable, it makes a lot of sense to extend the client lifetime as far as possible. Because when a client churns, your practice will lose everything it has spent to acquire and support that client up to that point, along with all of their future revenue (direct and indirect).
If your practice isn’t consistently achieving higher retention rates year on year, then you need to figure out what you can do to arrest the leakage of existing clients, because that’s having a direct impact on the value of your practice.
Ray McHale is chief executive and co-founder of start-up advice consultancy MyNextAdvice. McHale contributes exclusively to Professional Planner on using customer relationships to make smarter business decisions.