Repeat Business Rate Is Overrated

My first client, a 35-person engineering firm, boasted a repeat business rate of 85%. Unfortunately, almost all that repeat business came from one client, a large energy company. When that company was acquired by a still larger one, the work began disappearing. Within a few years, the firm was out of business.

Most A/E firms tout their repeat business rate as a sign of distinction, an indicator that clients love them so much they keep coming back. But it is hardly a reliable measure of health. Industry data suggests that the average repeat business rate—measured as the percent of revenue coming from repeat clients—has hovered in the 75% range for many years. That includes during the Great Recession.

Given how A/E firms struggled during the recession, I'd suggest that any financial indicator that remained unchanged during that time would have to be judged suspect. In fact, many firms undoubtedly saw their repeat business rate improve as revenues fell, because it was so difficult to acquire new clients. Has client retention really held steady as the repeat business metric seems to indicate?

So why does it matter? Well, firms often resist measuring client satisfaction or improving service because they can point to a favorable repeat business rate. Others (like my first client) find themselves vulnerable to a major client defection because they become too comfortable simply keeping busy without winning new clients.

A misleading metric like repeat business rate can have an adverse affect on your business. It can lull firm leaders into complacency, or obscure significant threats or weaknesses. The fact is that the best firms I've worked with had repeat business rates of 75-80%, as did the worst firms. In some cases it indicated satisfied clients and strategic relationships. In other cases it pointed to an inability to grow the business with new clients.

It's not uncommon for A/E firms to derive 80% of their revenue from a relatively small proportion (15-30%) of their clients. So the reality behind the repeat business rate is that most firms suffer from a fairly high rate of client turnover. Of course, it's debatable what percentage of those short-term clients have a realistic potential for becoming repeat clients. Some aren't prone to showing loyalty to any firm; others only sporadically have need for A/E services.

There seems no easy way to measure client retention in professional services. If you're looking for marketing value, writing "68% of our clients hire us again" probably sounds better than "80% of our revenue comes from repeat clients." But what's a good number? We don't have industry benchmarks beyond the percent-of-revenue metric. And the business value of the percent-of-clients metric is questionable without bringing revenue or profit into the discussion.

The best way to measure client loyalty is to use multiple metrics in combination. Let me suggest experimenting with a mix of three metrics—client lifetime value, client retention rate, and client satisfaction. This presentation by Client Savvy provides a great summary on how to calculate and evaluate these metrics.

This white paper by consultant Harry Mills describes some interesting ways to analyze the correlation between your revenue, profit, and clients. I'd encourage you to consider using some of these less common measures. And if you happen to have any other good ideas for measuring client loyalty, please share them below!