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.
Business owners must focus on diversifying revenue streams to stay afloat. Here are some ways to avoid high levels of customer concentration:
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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