When Are You Too Dependent on One Customer?

I once started a business which exceeded its first year revenue projections by tens of thousands of dollars. How? Largely by securing a high margin account within weeks of startup.

Then, eighteen months into the engagement, the client was forced into massive cost-cutting. He terminated our services without warning. And in short order our total revenue plummeted to a near break-even point.

How do you determine whether you are overly dependent on one or two customers or clients? There's no universal answer to that question, because each industry is different and each customer is unique. But you need to arrive at some answer for yourself.

As for me, I consider my businesses in a precarious position if losing any one customer would cost the business 20% or more of its revenue. Could I survive with that kind of loss? Certainly. Economic downturns have forced me to do so several times.

But I want my business to do more than survive. I want it to thrive. Thus, when I see my dependency on a single client approaching 20%, I'm reminded to redouble my marketing effort. I need more business in the pipeline so that our revenues don't miss a beat, even if this major client goes away.

Set benchmarks to determine when your business is too dependent on a single customer.

In a retail business, of course, you're not likely to have a situation in which any one customer is responsible for 20% of your revenue. But if your business is in fields such as consulting, professional services, and contracting, every customer represents a significant percentage of your revenue.

You therefore need to establish your own metric to determine when your revenue has become too dependent on a single customer or client. Treat this metric as a trip wire. When you reach that level of dependency with any one customer, start taking action to broaden your customer base.

Another thing to consider is whether your revenue is too dependent on customers or clients who generate narrow margins for you. You may not have a single customer on which you depend for 20% of your revenue. But what if you are only realizing half of your target margin with 40% of your customers?

In this case the impact on your top line is not so drastic as the loss of a customer who brings you 20% of your business. But the impact on your bottom line is just as great as losing that 20% customer.

This is why it is important to track your margins on every account. Periodically ask yourself how do these individual margins compare to your target margin? If you answer that the margins are too low with a significant percentage of your customers, it's again to step up your marketing. Keep working for the moment with your lower-margin customers. But be looking for higher-margin customers to replace them.

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