Losing by winning
A referral is an important validation of a client’s perception of your value, but problems can surface when there is a mismatch between the value that you deliver (service) and the value that your business receives (revenue).
There’s a strategic flaw when the following dynamic occurs:
Resources you deliver > Resources you receive
This is negative margin. In terms of auto manufacturers, you’re offering a Lexus at Corolla prices. It’s a simple concept, but one that is pervasive among most financial advisors: Too much for too little. Beyond the obvious economic consequences of negative margin, another consequence surfaces: You gain referrals from this segment. Negative margin translates into a “great deal” for the client. This dynamic compels the client to tell others about the “great deal” (viral marketing) and your business grows by the way of referrals who expect more resources than revenue paid. Wouldn’t you tell your friends about the dealer offering a Lexus for a Corolla price?
Over time, the number of “great deal” households increase, which leads to capacity constraints. As the capacity ceiling is eclipsed, a number of implications can surface: operations become overwhelmed, team morale declines, service quality decreases, and brand deteriorates. The biggest consequence is the inability to effectively deliver quality service to the entire client base; top clients, in particular.
Your clients want value. Your clients deserve value. Rather than thinking in terms of your bottom line, begin by thinking about the value that you deliver to your clients. Use revenue per client as your starting point to understand the resources you collect. Next, move to revenue per hour to understand the value of the resources you can deliver. Finally, cross the revenue per household by the revenue per hour to gain a more comprehensive understanding of how much time/resources should be committed to your service model. You may figure out the economic balancing act and protect your business from negative margin consequences.
I’ve heard people refer to Costco as “the only place where you can go broke while saving money”. Translation: Too much of a good thing can end up being a bad thing. Referrals are an excellent reinforcement of the value that you deliver; just make sure that the value reinforcement isn’t coming at the expense of your operations, your business, and most importantly, your overall client satisfaction.