What is more critical to your business: finding new, more prominent clients or retaining smaller, recurring clients? Companies should aim for a healthy mix of both to survive long-term. If you’re not considering your diversification strategy, you’re likely in danger of customer concentration risk.
What is Customer Concentration?
Customer concentration is a business metric that reflects the distribution of your revenue sources. When much of your revenue comes from only a few clients, you face customer concentration risk.
Maintaining relationships with and managing a few larger clients is undoubtedly more manageable than many smaller ones. However, when most of your revenue comes from only a few big clients, you have too much to lose from even one of them taking their business elsewhere. You can’t refuse if they try to squeeze you on pricing and terms.
You can calculate your customer concentration by locating your total revenue from one client for the past year. Divide that number by your yearly income, then multiply the total by 100. This will give you the percentage of your overall revenue that this client represents.
Do this for each significant client or customer to ensure that losing one client will not financially devastate your company. A good range for the maximum percentage is 10-15%, but this will vary depending on the organization. You might want your threshold to be even smaller to play it safe.
How to Diversify Your Business
Business owners must focus on diversifying revenue streams to stay afloat. Here are some ways to avoid high levels of customer concentration:
- Seek out new clients even when things are comfortable. Consider expanding into new markets or creating new products. It’s better to have a wide variety of clients to avoid being affected by regional or industry-related economic hiccups.
- Consider offering incentives for longer-term contracts. This will make it easier for clients to leave with a warning and give them a reason to stay.
- Take good care of your existing clients. Provide impeccable customer delight, and communicate clearly if any changes to your business are expected. Don’t give someone a reason to leave if they are otherwise happy with your product. Experts say that two-thirds of customers leave businesses due to perceived indifference.
- Focus on quality and pricing. If you’re outshining your competition on multiple levels, there will be no reason for your clients to go elsewhere. You can charge more if you’re offering more value in some way than your competition, but lower prices will always be attractive to new clients.
- Treat your smaller clients with the same care level as your larger clients. Although they make up a smaller portion of your overall revenue individually, they matter much collectively. Your reputation will likely get around, so make sure it’s a good one.
As a business coach, I’ve helped many clients improve their business optimization and leadership skills. For more tips, click here to sign up to have my weekly blog articles delivered straight to your email inbox.
Coach Dave
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