You’ve worked hard earning a big account—in fact, the largest client your company has ever served. While you should take time to celebrate, you also need to develop a strategic plan to ramp up your staff to accommodate this client, identify how to keep them, and consider your customer concentration risk.
That last one is also the scariest. Landing a large new customer is great, but it’s important to grow and diversify your clientele. If the unimaginable happens and you lose that one account, will your business survive? In other words, instead of putting all of your eggs into one basket, you’ll need to decrease your customer concentration risk so your company, employees, and other clients can rely on you for years to come.
What is Customer Concentration Risk?
Customer concentration is a basic equation that calculates the percentage of revenue you earn from one or more clients. For example, if your company’s annual revenue is $5 million, and one of your customers accounts for $1.5 million of that, their customer concentration is 30%:
$1.5 million / $5 million = 0.3 or 30%
You might adjust the equation slightly to identify how much revenue you earn from your top five clients. Let’s consider the following scenario:
- Your company’s total revenue is $10 million annually.
- Three of your top clients spend $1,250,000 each with you each year.
- Two of your top clients spend $750,000 with you each year.
The formula would read:
[(3 x $1,250,000)*(2 x $750,000)] / $10,000,000 = 52.5%
Now we’re getting into your customer concentration risk: what percentage of your company’s revenue should your biggest client or clients account for, knowing that you’re at major risk if you lose them?
As a leader in your company, it’s your job to mitigate this risk. If your organization is in danger of reducing staff, damaging relationships with other customers or vendors, or shutting its doors entirely if you lose just one client, your customer concentration risk is too high.
How Much Revenue Should Come from Just One Customer?
Losing a customer is never a pleasant experience, even if you’re the one who suggests terminating the relationship. Regardless of whether they walk away or you show them to the door, losing a client means losing revenue—but how much loss is too much? According to best practices in the Software as a Service (SaaS) industry:
One single client shouldn’t account for more than 10% of your total revenue, and your top five clients shouldn’t collectively account for more than 25%.
This means that if you lose one client, even your biggest one, you’ll be able to retain your staff that supported that customer, and you’ll have enough incoming cash without that account. Additionally, since you already have a robust customer base, you can leverage your network to bring in new business.
Said differently, when you reduce your customer concentration risk, you can dance in the rain instead of weathering the storm if and when you lose a key client.
Tips for Reducing Your Business’s Customer Concentration Risk
So then, how do you reduce your customer concentration risk if your company currently relies a bit too heavily on one client? As with so many aspects of business, the answer starts with sales.
Set sales expectations for growing the revenue from your existing customers using our Growth Strategies Worksheet. Then, outline targets for your sales team to bring in brand-new accounts. Periodically track KPIs like revenue per customer and customer concentration (start by reviewing the numbers monthly and change to quarterly once you’ve reduced your risk and are in a more comfortable position). Basically, never stop growing your business.
In case you do lose one large account, avoid the poison fruit of replacing it with another big client. Swapping one huge customer for another big spender doesn’t actually mitigate your customer concentration risk. It just delays you solving the underlying problem.
Advantages of Having One Very Big Client
Despite the concern about customer concentration risk, there are advantages of having a large client…as long as you don’t rely on them too heavily. Your biggest and best client can help you scale your business and lend credibility to your company’s products and services. It can even open up more silos for you if that one client requests something that you don’t currently offer. If there’s a chance you can fulfill their needs, it may be worth considering, provided it makes sense within your overall strategic plan.
Enjoy your large accounts and take outstanding care of them. Just occasionally ask yourself: “What would happen if we lose them?” If thinking about the answer makes you shudder, it’s time to get some help assessing and reducing your customer concentration risk.
Guard Against Customer Concentration Risk with Our Customizable Corporate Services
Companies end their partnerships for all sorts of reasons. Although it could be due to poor service or a dispute, there are also positive reasons, like a client retiring or selling their company. Even if you provide the best support available, losing a customer is always a possibility. The important thing is that you mitigate your customer concentration risk so your company doesn’t suffer a huge impact when a client leaves.
We offer customizable corporate services and retreats to help you avoid the risk and keep on thriving. Contact us today to learn more!
Written by Britt Spread