Do you have a single client that accounts for 50% or more of your annual revenue? 40%? Or even 30%? If so, you may want to consider the financial risk implications to your business from having such reliance on a single customer. This situation isn’t uncommon, even for established businesses, and it’s important for every organization to analyze their reliance on a small customer group. Having all your eggs in one basket, so to speak, could be an issue if something happens to that customer. We’ll come back to that, but first, let’s explore how this situation increases risk.
Like an investment portfolio, diversifying your capital across multiple assets will lower the inherent risk of that portfolio. What does that mean? It means that spreading your money over several different types of investments (like stocks, bonds, mutual funds, and index funds) will be less risky than having everything in one type of asset or a single investment. The theory is that if you had all your money in say Apple stock and iPhone sales just took a major hit causing the stock price to plummet, you would lose a considerable amount of money. If, however, you had your money in Apple stock, treasury bonds, S&P500 index fund and Amazon stock, then the amount of money you would lose when Apple slid would be limited compared to the single stock portfolio. This is why it’s important to diversify (which simply means spreading your money over different investments). So, if the stock market crashes or the housing market tanks, you don’t want to lose everything by being all in on those investments.
The same thing is true for clients in business. We definitely can’t control what our clients are going to do or how outside forces will affect the economy, a certain industry or a single company. What’s to say that one big client experiences a slowdown and needs to scale back their purchasing with you, or maybe they have a shift in strategy where they no longer need your goods or services. It could be that they fall on hard times causing layoffs, cost cutting or possibly even bankruptcy. The point is that these types of forces are totally out of your control and could happen without warning. Betting your business on a single client poses a high-risk situation and may very likely lead to significant financial impacts.
Now let’s set aside the financial risks for a moment and talk about the shift of power. Apart from the financial risks, betting your balance sheet success on that of a single or very few customers shift the power you have to influence your company’s direction to that of the customer(s). This may limit your ability to grow and operate on your own terms. You also have much less power to influence any aspect of the relationship. For instance, delays in paying invoices or forcing to accept heavily one-sided payment terms or unfavorable contractual terms and conditions aren’t disputed for fear of losing the client. I remember when I was first starting out, my biggest client pushed me to take a drug test and accept longer than normal payment terms to conform to their standards. I was afraid that if I pushed back, they would go with someone else. In the competitive environment of management consulting, there were plenty of other options they could choose from and I didn’t want to lose my top client. In the end, I met their demands (at my own cost) because it was a major portion of my business. Having less reliance on a single customer or client (through diversification) allows you to regain some of that power to negotiate better terms and conditions or to implement late fees for past due payments.
SO WHAT IS AN ACCEPTABLE REVENUE SHARE PER CLIENT?
Based on some expert opinions and research, it’s good practice to allow no single customer to constitute more than 20-25% of your annual revenue. In reality, it’s a number you feel comfortable with that’s commensurate with an acceptable level of risk. Several financial analysts even recommend a range of 10-15%. The higher the number (the greater the revenue a single customer is responsible for), the greater the risk of financial impact due to a change in customer behavior. To help determine exactly what that percentage should be, a risk assessment needs to be conducted to include a scenario where your largest customer is lost and the potential impact to your business analyzed. Primarily, will your company survive the loss without significant changes.
Even having 2-3 clients making up more than 40-50% of total revenue can be an issue, especially if they are all in the same industry. A simple shift in the economic environment could impact an entire industry, causing the loss of those clients and putting a major financial strain on your business.
WHAT CAN BE DONE, REALISTICALLY?
This obviously does not have a solution that can be implemented overnight or even in a few days. After all, clients take time to be acquired. Changing this situation and ultimately reducing customer risk can take months or even years. It’s something that should be part of a long-term strategy rather than a problem to be fixed in the near term.
Obtaining smaller clients to offset the larger ones can better diversify your client portfolio. New clients may be difficult to come by in your current market, so consider the following strategies that could lead to more diverse customers:
- Spreading out into new markets
- Introducing new products or services
- Offering your products or services in a new geographical region
Each of these strategies involves some additional level of risk including the need for additional capital. These new risks must be weighed against the financial impacts of not diversifying.
Think of client diversity as a bit of a hedge against the risk of a large client leaving and still maintaining sustainable financial stability. One thing that can start now is to conduct an internal assessment with the goal of determining what your current client breakdown is and if it exceeds your comfortability threshold. Do you need to diversify your client portfolio? Answering this question is the first step. If your client breakdown poses an unacceptable risk, then it’s time to start brainstorming potential solutions. One of the best ways to begin this process is to do some good old-fashioned research and find out what some of your competitors are doing or other businesses in your industry or parallel industries. Sometimes seeing how another company has solved the problem will spawn a solution that works for you and your company. I use this technique when I’m stuck or don’t like the options I’ve brainstormed on my own.
HOW WE CAN HELP
Unfortunately, we can’t acquire clients for you (that’s just not our primary mission), but we can help give you the tools that can lead to additional clients and greater diversification of your customer portfolio. For instance, if you are contemplating a shift in market segment, or offering a new product or perhaps introducing your current product lineup into a new geographic region, we can help.
We do focused industry analyses that are instrumental in making key decisions on new market entry and socialization. We can provide a snapshot of your current industry and provide barriers to entry, factors that make competitors successful and some creative strategies that can help set you apart in the new market.
We can also evaluate your current financial status to help you make crucial capital budgeting decisions. Coupled with an industry analysis, a financial assessment can be a powerful resource to lead your business towards the best possible path to stimulate growth and success. Contact Victory Business Group today to learn more about these and other services.
Here are some links to additional information on customer diversification:
https://www.incredibleoneenterprises.com/5-keys-developing-client-diversification-strategy/
https://www.inc.com/guides/2010/06/diversify-your-customer-base.html
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