Why is segmentation so important?

By nature, human beings are hoarders. We work hard collecting our possessions and it is difficult and even emotional for most of us to relinquish them when they are worn out or have outgrown their usefulness. We make up all kinds of excuses to keep our stuff, like for example, the old torn and stained chair from college that we might want to use someday or the suit that was outdated 10 years ago. Our closets are full of clothes that don’t fit or are out of style, our basements, closets and drawers are full of stuff we don’t even know we own, and our businesses have clients we have outgrown but continue to hang onto. Why have we outgrown them? There are several reasons why.

  • They don’t have enough asset value to justify our time and attention.
  • They weigh us down because we feel guilty about having them around and not paying attention to them.
  • We can’t tell the rest of our clients we give world-class client service (our brand) as long as we have clients we ignore
  • We may not want them, but we keep them because we feel loyal to them because they were our first clients.
  • Like our childhood blanket, they provide us with unsustainable emotional security.

The fact remains that 20% of our clients give us 80% of our revenues.

So what do we do? We pay attention to the 20%. However, every client deserves good service, but can we afford to give that service away for free? It takes a minimum of 20 hours a year of our time to service a client. When we add up financial planning, including cash flow analysis, educational costs, help with retirement, 401k’s, monthly contact, rapid response to problems, estate planning and investment planning, we may find we spend even more then the 20 hours. So we come to a point where we have to make a decision on the kind of practice we want to have. Do we want to be known as a financial advisor that gives world-class service to all of his/her clients or the advisor that takes anyone, but only services his/her best clients?

At what minimum do we have to be to make our business profitable? Lets do the math. If we charge 1% on 250,000 divided by 20 hours we get $125/hour. Law firms usually bill out between $300-$500/ hour depending on the seniority of the lawyer. Our minimum based on these professional comps should therefore be between $600,000-1,000,000. As we become more senior with more experience we should charge more.

Tony Singh says it so well. “When we work for free, we are philanthropist. When we take money and give nothing in return, we are criminals. We are neither, we are business people. We provide world class service for a fair fee.”

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