Practice owners of all sizes understand the importance of maintaining their current client base. It’s more costly to lose an existing client than it is to go find a new one. Existing clients are usually more profitable as well. It can take some time for a new client to become a profitable one for the new accountant or adviser. At the same time, switching costs make it an expensive endeavor for clients to choose a new accountant or adviser. However, as NEW BUSINESS is how accounting and advisory practices grow, professionals win this new business by either:
A: Winning work from clients who are new to business (and therefore do not already have an accountant or adviser); and/or
B: Helping those clients who do already have an existing accountant or adviser overcoming these switching costs.
To help us understand the issues pertaining to B above, let’s consider the (3) types of Switching Costs that exist:
Relationship-Related Switching Costs – This category is huge across professional services generally. These are the costs incurred through the interactions with the new adviser. These “learning costs” are often underestimated when a client entertains the switch. A typical accountant will often require a new client to expand their comfort zone, and not many clients are thrilled to do that. A new accountant? Sure, but you’re starting over in a lot of areas. Finally, since people buy from people they like, there may be psychological costs when a client chooses to leave their incumbent practitioner.
Direct Switching Costs – These are the immediate costs for clients when they switch firms. There are costs incurred during the search for a new adviser, mostly in the form of time. There is also the risk that the new practitioner is not the reliable replacement that they may first appear to be.
Product-Related Switching Costs – These are the costs associated with working with a new product or methodology that may be adopted by the new accountant (i.e. “How we do things around here”). There are often training costs, valuable time, and an almost certain drop in productivity during the initial phase of new implementation.
So, the (2) key questions one must answer when considering initiatives to win incremental fees from those whom already have an accountant or adviser become:
1) Under what circumstances will a client switch to a new adviser?
2) How can those situations identified from the answers to question 1 be professionally articulated and acknowledged when we first make contact with a potential new client?
Putting our economics hats on – If we define a client’s utility (Uc) as: Uc = Δu – Cc + G, where:
Δu = utility increase from switching, and
Cc = customer switching costs, and
G = “goody” (for lack of a better expression”) (with “goody” being what the new adviser uses to entice the client to switch), we understand that the client WILL ONLY SWITCH service providers when Cc ≤ Δu + G.
That is, the client WILL ONLY SWITCH adviser if the costs of switching are less than or equal to the combined utility increase from switching AND the prize that they would be given for making the switch.