Developing a better client portfolio

While learning to differentiate your existing clients

Nov 12, 2024

Today’s inspiration comes from the world of professional service firms:

A useful way to examine portfolios is to determine where clients fall in the four quadrants formed by comparing the cost to serve clients (CTS) with clients’ willingness to pay (WTP).
CTS doesn’t include direct service costs (such as billable hours and expenses). Rather, it comprises all the indirect costs incurred, including client acquisition and client relationship management and retention efforts.

Different Types of Clients.
This box divides clients into four quadrants on the basis of their willingness to pay and cost to serve.
1. The high cost to serve, high willingness to pay quadrant contains demanding clients who want the latest and best offerings, hand-holding, and turnkey solutions.
2. The low cost to serve, high willingness to pay quadrant contains unwaveringly loyal clients who deeply value services, spuriously loyal clients who don’t realize they’re paying high prices, unconcerned clients who think negotiating price reductions isn’t worth it, and hostages who can’t afford to switch.
3. The low cost to serve, low willingness to pay quadrant contains sophisticated clients who know exactly what they want at an economical price, bare-bones clients who want just the core, unbundled offering at a cheap price, and collaborative clients who will work with practices on innovations that reduce costs.
4. The high cost to serve, low willingness to pay quadrant contains marquee clients that exploit their leverage to demand special pricing deals, and risk-taking clients that coinvest with the practice in developing new offerings.

Most practices discover that their clients are spread across all four quadrants. That indicates that they have no clear strategy and are trying to be everything to everyone. This happens mainly because they can’t say no to clients.
The tendency to obsess over revenues rather than profits**, moreover, fosters an “any business is good business” mentality. (**my note: see the numbers game)

1. High CTS/high WTP.
Clients in this quadrant typically view the practice as a value-adding partner and look for long-term commitment.
2. Low CTS/high WTP.
Broadly, there are two client segments in this quadrant. The first are unwaveringly loyal clients. They deeply value the services provided and will pay a premium to keep getting them. (…)
The other segment we call spuriously loyal clients. These include uninformed clients, who don’t know they’re paying high prices and can be easily lured away; unconcerned clients, who have concluded that the cost of negotiating price reductions far exceeds the benefits; and hostages, who can’t end a relationship with a practice because of high switching costs.
3. Low CTS/low WTP.
This quadrant also comprises two client types. One rejects all valued-added services and wants the core, unbundled offering at a reduced price.
The second type of client (…) works with the practice to reduce costs through joint investments and learning.
4. High CTS/low WTP.
Clients in this quadrant are at best marginally profitable. They end up here for a variety of reasons. Often they’re a practice’s largest clients, volume-wise. (…)
It’s also common for showcase accounts—marquee clients that enhance practices’ reputations—to be in this quadrant. (…)
“Learning” relationships also can land in this quadrant: A client willing to share the risk of developing a new offering will often expect a discount for having “skin in the game.”

Ever since i discovered the CTS x WTP matrix, it has changed the way in which i manage my client portfolio, on the services side of my business.

Here are the top 3 insights i’ve used to improve the health of my business:

A. It started with becoming aware that there were indeed clients that were costly to serve, while having a low willingness to pay for the evolved services that i’ve started providing. This translated to High CTS/low WTP.

I had to decide whether to let them go, or to try to move them to the two adjacent quadrants: Low CTS/low WTP by optimizing indirect costs while continuing to offer services as expected. Or towards High CTS/high WTP by investing in educating them on the new services, showcasing added value, piloting projects in the new service portfolio, so their willingness to pay increases.

B. The other major insight has been on investing to evolve the relationship with clients with a high WTP, that are seeing the added, differentiated value that i offer. I’ve spent time reflecting on:

Why does this specific client have a high willingness to pay?
(Where/when/how) can i connect to prospects that are similar to these high WTP clients?

C. Also, after deciding to pursue a highly differentiated strategy in the local market on the services side of my business, this meant starting saying no to most opportunities coming from low WTP clients, so i can focus on high WTP clients with high and low CTS.

This has accelerated my professional growth by being able to partner with high WTP clients and co-invest in new areas of expertise (e.g. systems thinking, strategic foresight, strategic finance, platform business models and so on) while keeping an eye on the profit margins.

I’m choosing to share the CTS x WTP matrix with you because i found it’s the simplest and most effective way to apply strategic thinking on your client portfolio:

map your current client portfolio
decide where to invest/divest going forward
move to implement your decisions

It’s one of the bridges that can help rookie solopreneurs (with a consistent services side of the business) to progress towards becoming veterans with stable revenue streams and plenty of bandwidth to find ways of taking the business to the next level.

In the next edition of Solopreneur Gym, i’ll share a worksheet to help you use this client portfolio tool for your own business.

Stay tuned,
Bülent

Solopreneur Gym by Bülent Duagi

Discussion about this post