Speaker 1:
You’re listening to Rattle & Pedal, Divergent Thoughts on Marketing and Growing Professional Services Firms. Your hosts are Jason Mlicki and Jeff McKay.

Jason Mlicki:
All right, Jeff, as part of our multi-episode series on growth, we are going to do a sub-series, maybe a sub-drama, mini-series, three episodes with PBS. We’re going to do a sub-series on organic growth. We’re going to just talk about all the different levers of organic growth and where to start. Anyway, today, what we decided to talk about was base retention. Just this idea that if you’re going to grow a firm, you got to start with a baseline. You have to start by, I call it, solidifying the base. I’ll never forget, when I was in business school, and I’m diatribing before we even start, but when I was in business school, one of my faculty members always liked to call it the leaky bucket. You got this leaky bucket, and as a marketer, you can’t just pour water in the top of the bucket because it’s leaking out the bottom, so you got to reduce the size of the leak and then start pouring water in the top. That’s where we’re going to start.

Jeff McKay:
You know what’s great about that opening?

Jason Mlicki:
I talk too much?

Jeff McKay:
If you and I ever go our separate ways and your big brain starts its own podcast, you already have two perfect names for your new podcast, leaky bucket or diatribe.

Jason Mlicki:
Diatribe, did I even use the word diatribe correctly, looking back? I don’t even know.

Jeff McKay:
Oh, that’s classic. I’m writing those down for future reference. Speaking of which, I’m going on a sidebar here. I know I shouldn’t.

Jason Mlicki:
Sidebars are outlawed, team reason, bang, go.

Jeff McKay:
Our listeners, who listened to every episode, and I’d say that’s 99% of them, I’m sure, will recall several comments that one of the two of us made about big 10 football happening or not happening this fall? One of us gloated about being right and it wasn’t me, but our listeners know who ultimately was right around that prediction. That’s all I’m going to say. I’m not going to say who, I’m not going to say what, but if you want to know, you have to go back and listen to some of those other episodes. Let’s move on to base retention, leaky bucket.

Jason Mlicki:
Leaky bucket. Leaky bucket, is that a broadly used metaphor or is that one that’s pulled from the bowels of a personal experience?

Jeff McKay:
No, I think that worked well. I’m a farm boy, so it works for me.

Jason Mlicki:
All right. In setting this up, I thought you were really articulate for once in terms of this notion of churn, the idea that you have a client churn inside of your firm or your business. And you have to understand that first, but I thought you also were really articulate in saying how, if there’s a relationship between the business model you have and what churn looks like. I just thought we’d start there. I’d like for you to talk a little bit about what you meant by that because I thought it was really strong, good thinking.

Jeff McKay:
Your metaphor for a leaky bucket is an excellent one and everybody gets it. It’s really hard to get the job done if you keep filling up a bucket, but it’s running out at the bottom and whether you’re selling services or selling software as a service, or you’re selling widgets, if you start out a fiscal year at zero or something, less than a hundred percent from the year before, it makes getting to the next year’s number really hard. And I think most organizations understand that concept, but may not fully understand some of the best ways of fixing it. And often I think there are two drivers of churn. The first one is business model and this is particularly true professional services. Are you offering a project-based solution or an annuity-based solution? If your project and your projects run less than 12 months, you’re going to be starting from a larger deficit.

Jeff McKay:
The second is client satisfaction and retention. Our clients leaving because they’re not happy with your service or haven’t adopted the service in the case of software companies are like, “Oh yeah, that was a great idea,” bought a subscription and never really fully adopted it within the organization and are moving on. Understanding the business model and to what degree that’s driving that effort, is really important. And I think most people know that, but I don’t know when they’re doing their planning that they think is thoroughly about how they might alter that model to engineer climbing out of that hole every year.

Jason Mlicki:
Yeah. I’m thinking through in my head. It’s interesting that this is a random comment, but some of the really large A&E firms are publicly traded. If you look up like, I think Stantec maybe, or AECOM, I can’t remember, but the really large ones are publicly traded stock and so you can look at their financial reports. And what’s really fascinating is I remember, I looked at one once and I can’t remember which firm it was, but in the revenue and profitability analysis for the firm, they described very specific projects. A project that was running over its cost controls and hampering the firm’s financial performance because they work on such large global megaprojects. And it’s almost like on one extreme, you have firms like that, where you’re working on such large projects that they literally drop onto an income statement of a publicly-traded company as a negative occurrence or a positive one, perhaps.

Jason Mlicki:
You’re replacing that, year in year out, I suppose. And that’s probably the churn model for that as you point out is really different than a more of an annuity based service, maybe a small accounting firm that provides tax and advisory services and it’s got a wide base of clients that are buying 20, $30,000 tax engagements year in year out. The churn rate on that is really low except for client service issues. Maybe it’s a continuum from one end to the other and firms exist somewhere in that continuum. And you just have to start by figuring that out. And correct me if I’m wrong, maybe you have to look at it by a practice level too. If you’ve got a larger diversified firm, there are practices that probably have higher retention rates because of the structure of the service and there are ones that have lower based on whatever it is that they deliver. Are their targets for this?

Jason Mlicki:
In your experience and in the firms you’ve worked in, did you have retention rate targets that you’ve… I have random numbers I’ve selected from talking to clients. I’m just curious on your side, did you see a retention number? And how would you even measure that, as a revenue number? Or what is it?

Jeff McKay:
The firm really looked at this differently.

Jason Mlicki:
There’s not a single number of benchmark that we can use that you’ve… We know how much you love benchmarks. You have one, right?

Jeff McKay:
Well, every firm thinks about it differently. Some look at years, that a client has been there for a particular service or you take pride in that. You don’t want to be the partner that loses that. Sometimes it looks at it revenue, of course, but most firms operate under the assumption that they’re going to lose some amount of base, either through the acquisition of a client by another client or non-client, or natural turnover if there’s some cycle for doing a public audit or somebody goes out of business, whatever the case may be. And they assume that’s coming from somewhere, oftentimes they have no idea where, which I think is not a good approach to understanding your client base. They always feel like, well, we have to get new business elsewhere to replace what’s there because they assume it’s going to be lost even if they don’t know where it’s coming from. But every firm is different in that regard.

Jason Mlicki:
Yeah. Really there’s no number, it’s more just, you have to understand your retention model. How much of your revenue is inherent and your business model is going to need to be replaced each year in order to get growth. If year over year, you have enough project work that you’re going to have to replace 30% of your revenue to be stable, then you have to grow 40 or 50% in revenue to grow, right?

Jeff McKay:
Jason, I like the way you articulate it. I think it’s a great point. I think top firms look at that number in that churn and they make it a priority to reduce it. And the urgency in reducing it, I think is driven by two things. One is culture. We want to keep these clients, we want to be known for great service. We don’t want people leaving, because they’re not happy with us.

Jason Mlicki:
Interesting you bring up culture. In the sense that, I imagine in some firms, there are two competing pieces in culture. On the one side, you have the desire to serve the client and be client-centric if you will, which encourages high levels of retention. That’s a better business model inherently, has a lower churn, makes it easier to grow. On the flip of that, there’s this desire to do great things, great work, great projects that I’ll use the classic example. It’s like a Fountainhead type example of the legendary architect, the I.M. Pei’s of the world, that signature skills, signature designs that clients only hire once in a lifetime, if forever lucky. And there’s probably this internal drive within, the talent within the firm to be the absolute best at something. And when you’re the absolute best at something often, that inherently means that you’re only brought in to do that one thing, and then you’re never brought in again and you never see the client again.

Jason Mlicki:
It seems to me there’s a tension there that a lot of firms might face, in terms of the desire to be the best in the world at a very narrow discipline or a piece of that discipline versus the inherent need of the firm to lower churn to have a healthier business model and to grow. Am I crazy?

Jeff McKay:
No. I think you are an idealist. And a Randian idealist at that. Ideally, yes. I think you create a brand that is stratospheric and in that regard, but the reality is there are economic booms and busts and the amount of churn you’re willing to accept in a boom, is not going to be the same as the amount of churn you’re willing to accept in a bust. But the best firms are always looking at churn and most importantly, understanding it and managing it. Because a certain amount of churn is healthy. And if you’re retaining all your clients, I question whether or not that makes sense. And one of the important things I think we should talk about in terms of base retention is, what part of the base do you actually want to retain? And top firms look at the client makeup and they understand why each one of those clients is in the portfolio.

Jeff McKay:
And the first place to start is profitability. Every firm that I’ve been in that has had the sophistication to quantify profitability on it on a client by client basis, produces just incredible insight on where the revenue is coming from, more importantly, where the profit is coming from. And they’re making strategic decisions about which clients to keep, which ones to get rid of, how to allocate resources within the firm to that client base. Most firms are not thinking that way. They do it on an anecdotal or an intuitive basis, but I’ve sat in leadership meetings and gone through client profitability lists and we see brands on these lists pop up and I’m like, “Oh my gosh, I can’t believe we’re losing that amount of money on that client.” Or, “I can’t believe we’re making that much money on that client.” And it really builds a deep understanding of the client base. And that just has so many tentacles into other areas of the firm and learning that can be applied to the growth.

Speaker 1:
You’re listening to Rattle & Pedal, Divergent Thoughts on Marketing and Growing Professional Services Firm. Your hosts are Jason intuitive principal of Rattleback, the marketing agency for professional services firms, and Jeff McKay, former CMO, and founder of strategy consultancy, Prudent Pedal. If you find this podcast helpful, please help us by telling a friend and rating us on iTunes. Thank you. Now back to Jason and Jeff.

Jason Mlicki:
Talk to me a second about the relationship between profitability and client happiness. You talked a little bit in setting this up, about this idea that your referral strength is a function of your base retention, meaning that, if you’re retaining clients, you’re likely to have higher referral strength. Is there a relationship between profitability and client happiness as well?

Jeff McKay:
That’s a great question. Yes and no. There are clients, and I would put myself into this group as the buyer of professional services, as a CMO. I am willing and happy to pay a premium for incredible results and expertise and service. When you’re writing checks and you’re working with a partner that is helping you advance your agenda, you’re always happy to write those checks. I should say, you’re normally very happy to write those checks. When you’re being charged a premium and you’re not getting what you expect, you’re not happy writing those checks. The best firms, when they do clients ad, they normally have an indicator on there for value for fees and look at it very closely because that’s a measure of that area. I’m happy to pay you this amount, I’m getting value. It doesn’t say what the numerator and denominator are, but there is a sense that what I’m putting in is giving me more or I’m getting more out than I’m putting in. Yeah, I think so.

Jeff McKay:
And you mentioned something and this segues into our subsequent shows we’re going to talk about if you’re not retaining your base and your base is not being retained because it’s happy. And by that I mean, the only reason it’s sticking around is because you’re either the cheapest or the switching cost is too high, and the pain of a bad service hasn’t reached a level where I want to go through that pain to change, but that you have a happy base of clients is critical to other growth areas. I’ve been in firms where the product or the solution, and I have clients that are this way, where they’re blaming their lack of growth on ineffective marketing, when the fact of the matter is the product or solution is so weak, that marketing has to overcome such a negative perception just to start a conversation about the purchase.

Jeff McKay:
And if you have a base like that, it’s not doing anybody any good, and either the product needs to be fixed, or you need to get rid of those clients and find the clients whose expectation aligned with your level of service or your level of product functionality and quality. But most firms just treat that basis monolithic in its relationship to the services that it’s rendering and their satisfaction with it. And what they’re telling friends, because, in any complex B2B sale, particularly professional services, a referral is going to be at the very top. Executives call other executives and say, “What do you think about this or this person?” And if they’re not giving glowing commentary, you’re not going to get the business.

Jason Mlicki:
Yeah, no, that’s an interesting one. And we’ll come back to that another day, some time, just referrals in general. I think the interesting point about everything you just said to me is that there is a relationship between the clients you attract and the retention of those clients and the retention of the revenue if you will. Meaning that if you’re attracting the wrong clients, then retaining them is going to be harder. And so that whole notion of a profitability analysis seems really valuable in the sense of drilling down to these are the right clients that we really want to attract, now let’s make sure that marketing is aligned to deliver those. And if that’s happening, then our retention rates are logically going to go up because we worked from a place of data.

Jason Mlicki:
It’s interesting because, and this might be a topic we’ll come back to later one day is, you and I have both criticized the validity and value of personas and why would you ever want them? And I was doing some research for a client of ours on pricing. Looking to price a SAS product and I was reading a really well put together ebook on pricing from a specialist firm that really just works in pricing in the SAS space. And in their model, they had used personas, but they had used them differently than I had seen them before. And in this case, the personas weren’t these marketing generated, fluffy, visual and metaphorical references of individual clients, they were really hard data-driven analyses of specific clients in the software company’s portfolio and the nature of why they were buying the software and the relationship that, that brought in terms of the value of the software to their company and the price and all these types of things.

Jason Mlicki:
And there was a different way of looking at it, almost like you can imagine extracting personas from a massive data set versus extracting personas from the minds of a couple of partners in some creative collaborative sessions, which is how I think they normally tend to happen. But it just got me thinking, that type of thing might have some more validity to it than we’re used to giving it credit. Let’s move to wrap here. I think we’re running out of time, but let’s touch on one last thing before we go. Because you mentioned in the setup, building key account management programs are a critical piece of reducing churn and increasing retention. Let’s talk about that for a few minutes before we call it a day.

Jeff McKay:
The best jump-off point for that in my mind is what you just said. If you’re going to focus on retaining your base, you need to… Just like building a house or a skyscraper, that foundation has to be as strong as possible because of the profitability and annuity of retaining base, reducing the cost of sale of creating a referral flywheel if you will. You really need to understand who your ideal client is. And the ideal client is, and we’ve talked about this on podcasts. I’ve written about it. I’ll put links in the show notes. And as you said, it’s very different than personas. I am not a fan of personas at all, but by finding your ideal client, and it’s a lot easier than you think, you find the clients that value the value that you provide. That’s the ultimate goal. Identify those clients who value the value you provide.

Jeff McKay:
You need to understand what exactly the value is you’re providing. And we talked about this and value propositions, that most people don’t, and find those that are willing to pay a premium for that. Look at your base and make sure you’re focused on those. Then, the key account management is really about strengthening the ties to your firm. And sometimes that comes through relationship, but not always, it mostly comes from results, but there are also other ways to tie clients in, but it always has to come back to value. And if you’re wasting energy serving clients, that don’t value you, that means because to some degree, it’s a zero-sum game if you have limited resources, those that really could be benefiting and appreciating the value provide are not getting the fullest extent of what you offer. Key account management should focus on that. And we could do a whole series on key account management, for sure, but the key account management, in addition to retaining the base really puts you in a position for the next avenue for growth. And that’s selling more of what you offer to existing clients.

Jason Mlicki:
Yeah. And that’s going to be the next episode in the series. And I’m going to suggest we flip it around. The more I think about it, it’s not necessarily about selling more to existing clients, it’s about encouraging clients to buy more. Building to your point, that notion of key account management, building a way for them to want to buy more because they’re getting more value and they’re finding other ways to get new value from you. And maybe we were thinking about it backwards, but either way, that’s the topic that we’ll tackle the next time.

Jeff McKay:
And you raised a good point there, that ties it all back to the way we started. And your business model to a large degree impacts the starting point for level of churn. That’s the playing field. And if you’re a SAS company, you have a certain playing field. If you’re a project based services firm, you have a certain playing field. If you’re annuity, you have a certain playing field, but I have clients where the majority of their new business comes through channel partners. And channel partners create a totally different business model structure for churn and its own challenges, because so many of those channel partners have high turnover in their salespeople, moving around. And just when you think you have a great end, somebody leaves and you’ve got to rebuild. Understanding the business model and the ideal client that appreciates the value that you offer and constantly understanding what’s causing the churn and how to reduce that, is the only way to deal with the leaky bucket as you said, in your diatribe.

Jason Mlicki:
Yeah. Plugged leaky bucket right there. All right, man. Well, now that we’ve plugged the leaky bucket, next time we’ll talk about how to grow the buckets maybe, or add water to the bucket, not sure which. But one or the other.

Jeff McKay:
Get more buckets.

Jason Mlicki:
Yeah. Get more buckets. All right. Sounds good.

Jeff McKay:
See you buddy.

Speaker 1:
Thank you for listening to Rattle & Pedal, Divergent Thoughts on Marketing and Growing Professional Services Firms. Find content related to this episode at rattleandpedal.com. Rattle and Pedal is also available on iTunes and Stitcher.