The Dangers of Customer ConcentrationMar 07, 2018
When our business is doing well, it’s easy to just enjoy the ride and ignore dangers lurking below the surface. But those dangers can emerge at the worst times to deliver damaging blows to our growth, our revenue, and our overall success.
“Customer concentration” refers to the amount of your revenue that relies on a single client. Usually, a business is said to have too much customer concentration if more than 10% of its revenue is reliant on one single client – or if revenue portions greater than 10% rely on multiple single clients.
This might not seem like something we need to worry about. After all – the money’s coming in, right? But we all need to take steps to avoid customer concentration. And here’s why.
1. It can make or break your business.
Everyone knows that saying about putting “too many eggs in one basket.” If the basket falls – all the eggs break. So it’s safer to carry your eggs in two baskets, or three, or more.
The same goes for your business. If too much of your revenue is coming from one source, then if that client drops you as a provider, or falls on bad times itself, all your eggs will break. You lose that revenue, and, with it, your ability to run your business successfully.
This doesn’t just apply to businesses that have one large customer. If your target market is very narrow, that can be just as dangerous. Smart Business offers the example of an HVAC company that specializes in custom pharmaceutical heating and cooling equipment.
Very niche specialization limits your market to a handful of customers. And your reliance on those customers means that if too many of them decide to head to a different provider, you’re in just as much trouble as the business that lost their one big client.
2. It affects your value proposition.
Just as too much customer concentration creates dangers for you, it will create issues for a potential buyer. If your revenue comes largely from one source, a potential buyer will have a slew of questions and concerns, like:
- How easy would it be for the customer to go to a different provider?
- Does the customer have a special relationship with the current owner? Will that relationship fall apart under new ownership
- What would be the damage of losing a major customer?
In the end, the more diverse your customer base is, the more your business is going to be worth in a sale. It’s all about risk. High customer concentration makes operations precarious enough for you – I’m sure you can imagine that it’s even worse for someone assuming new ownership.
3. It can seize the reins of your operations.
Obviously, having one big customer means that you rely on them – for revenue, for success, for your business’ reputation. When you depend on a client, any requests that that client makes, ridiculous or reasonable – you’re probably going to have to fulfill.
This makes your business subject to the whims of your client. And while it’s true that the customer is always right, providing good customer service is a big leap from reshaping your daily operations to better fit a customer’s needs.
I understand the inclination to bend over backward to please your biggest revenue sources. But your company needs to maintain an independent, reliable identity of its own.
If you reshape your business to fit one client, then by definition, it’s not going to fit any other clients. And it’s better – and safer – to serve a wide range of clients than to serve one whale. Even if there’s more money in that whale.
How can you protect yourself?
No matter how good the good times are, we have to be aware of the possibility of extreme lows. If your revenue comes from a wide variety of sources, you lessen the impact that losing one client will have. You mitigate the possibility of extreme lows.
So reach out to other customers, and extend yourself out of your niche market. Find places where your product or service can be valuable in unexpected ways. Strengthen your relationships with your big clients – make sure that you are an irreplaceable partner in their operations.
Most of all, don’t let your big clients dictate your business decisions. Look at the market as a whole – and your client base as a whole too.
Questions to consider:
- What sort of customer concentration do you have? How diverse is your client base?
- Do you serve a very niche market, or do you appeal to a wide range of customers?
- Have you ever changed your business to better fit the needs of one specific client? Has it affected you positively, or negatively?