L. Reeb

Dominic Cingoranelli
Client classification: Do yours make the (letter) grade?

Firms need to take a hard look at their client lists to make sure they have the right mix.

December 2, 2013
by William L. Reeb, CPA/CITP, CGMA, and Dominic Cingoranelli, CPA, CGMA

Editor’s note: The following is an edited excerpt from the co-authors’ book, Becoming a Trusted Business Advisor.
Over the years, many firms have grown and developed according to some previous strat­egy, or none at all. The result is that the firm has taken on some clients that may not belong in the firm’s current business model, strategy, and future. Additionally, some clients have evolved or changed in ways that may make them less desirable as clients today than a few years ago.

For that matter, for one reason or another, some of a firm’s current clients never should have been engaged in the first place. For all of these reasons and more, firms need to take a hard look at their present clients and at their client acceptance and retention poli­cies—and clean house.

A letter system for classification

We use a simple system for classifying clients. Our sample client definitions are as follows:

  • A-clients. An A-client is one of the 15% to 20% of the clients that account for 70% to 80% of the firm’s revenues. If you sorted clients by revenue for the previous year (clients representing relationships, not just one entity), you would identify quickly those clients that generated substantial fees. An A-client is one that you are probably adequately serving, one that will continually have new projects for you and that generates sizable revenues for the firm.
  • B-clients. A B-client is one that, right now, you most likely are underserving but that has potential to generate sizable revenues for the firm. For example, you might have a business client for whom you only do tax returns. However, based on what you know of the business (e.g., it has $5 million in annual revenue or more than 100 employees), you easily could provide it with thousands of dollars more in needed services each year.
  • C-clients. A C-client is a client that does not have much additional service opportunity other than what you already do, and the revenues generated are small. However, C-clients are good clients, do not have complex situations, pay on time, pay average or better fees, and are pleasant to work with. The best description of this group of clients is they are typical individual tax return-only clients. Don’t confuse the C rating with school and assume they need to become B-clients to make the grade. A firm can have all C-clients and do very well.
  • D-clients. A D-client could seemingly fall into any of the preceding classifications. However, these clients present at least one of a number of possible problems. They most likely are unprofitable to the firm as a result of poor rates, realization, or utilization. They also might be hard to work with because they are abrasive, late payers, never timely (and always creating scheduling problems), always want special accommodations, require services that are too difficult to provide (e.g., this client is the one governmental audit you perform—an inefficient use of the firm’s time), or only pay your last bill as an incentive for you to start the next project.

None of these issues alone automatically classifies someone as a D-client. For example, you might have someone who always pays late (but always does ultimately pay), and you always charge the client a premium fee for work to make up for this business approach, which makes him or her an acceptable client. Or someone may constantly negotiate every fee but, nevertheless, involves you in big projects that are profitable for the firm.

Generally speaking, most firms quickly know who falls into the D category. At the end of the day, you do not want any D-clients. This means that your objective is to either find a way to convert them into C-clients or better, or introduce them to your fiercest competitor. In the latter instance, you have positioned these clients to waste your competitor’s resources instead of yours.

A little more perspective

Once again, it is not a bad thing for a CPA firm to have only C-clients. In this situation, the firm’s client base could be described as a cluster of small clients that pay timely and are fun to work with but who have little potential to provide additional business. In this case, you would make sure these clients are reminded regularly of your various services through postcards, newsletters, seminars, and other means. In this way, they are positioned to refer you to others because they likely will not have many additional needs themselves. On the other hand, regarding your A- and B-clients, you need to have regularly scheduled personal contact with them to make sure you understand their priorities (and not just their financial priorities).

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William L. Reeb, CPA/CITP, CGMA, and Dominic Cingoranelli, CPA, CGMA, CMC, are the co-authors of Becoming a Trusted Business Advisor: How to Add Value, Improve Client Loyalty, and Increase Profits, which is available for purchase at the AICPA Store. They are the co-founders of Succession Institute LLC.