Winning a large customer can transform a business. Unfortunately, becoming too dependent on that customer can also create a significant risk.
Consider what would happen if your largest customer disappeared tomorrow. Would the business remain profitable? Could employees still be paid? Would there be enough cash to meet existing commitments?
Customer concentration can develop almost unnoticed. A successful relationship grows, orders increase and the customer becomes an increasingly important source of revenue. What initially appears to be excellent news can eventually leave the business exposed.
Start by identifying how much of your turnover comes from your five largest customers. It is also worth looking at profitability. A high-turnover customer is not necessarily a high-profit customer, particularly if it receives substantial discounts or requires significant management time.
Then consider how secure the income actually is. Is there a contract? How long does it run? Could the customer move to a competitor relatively easily? Is your relationship with several people within the customer's organisation or dependent upon one contact?
Customer concentration is also important when a business is being valued or offered for sale. A prospective purchaser may discount the price if a substantial proportion of profits could disappear with the loss of one customer.
If the business is over-dependent on one or two customers, consider how this exposure could be reduced. Developing new markets, widening the customer base and encouraging smaller customers to buy additional services can all help. Losing an important customer will always be unwelcome but it should not threaten the survival of an otherwise successful business.
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Published by The NAS News Team
