Concentration Risk! Not a risk with concentrating so hard your brain hurts, but the risk associated with your business being reliant on too few customers.
For many businesses, once they win the first BIG deal there is a feeling of excitement and achievement. You’ve finally got that deal that will deliver the revenue you have been chasing and allow you to set in place the business operations and processes to deliver the profits you have been targeting. The problem for most businesses is the fact that this win often drains resources and there is little or no follow-up to generate more significant sales. The risk is obvious, if this customer leaves, for whatever reason, your business is vulnerable.
We were recently engaged by an engineering company who found themselves in this unwelcome predicament. 60% of revenue was generated from just one customer. A customer who was now on the market and the suitors all had alternate suppliers to our client. Their business was at risk. How did this happen? Effectively the business was so busy looking after the interests of this major customer, they ‘forgot’ to continue with business development. This customer provided adequate revenue to sustain the business and the lifestyle of the owners so they saw little reason to have to build the business further. Fortunately for them, they had developed a very strong relationship with a key individual in the business who was retained by the new owners and whose opinion was valued when new contacts were being let. They ‘dodged a bullet’ but did not want to be in this situation again. We have since worked with this client to establish a sound business development plan that focusses on:
- Marketing and sales initiatives that identify their ideal clients and how to engage with them
- Having a clear value proposition that resonates with the target audience
- Diversifying across a wider range of industries
- Customer profitability, not simply revenue
- Regular customer engagement across the depth and breadth of the business to ensure they understand their needs and identify unforeseen problems
- Annual (at least) risk assessments that consider the likelihood and implication of of an event on the business and what would be done should it occur – plan for the worst and hope for the best!
- And of course, building the customer base.
If you think this is a problem for start-ups and small business, think again. The corporate world is littered with the corpses of businesses (or sometimes just CEO’s and CSO’s) who got ‘fat, dumb and happy, riding the back of a whale. In October 2014, GT Advanced Systems filed for bankruptcy protection under Chapter 11 for what many believe is being too reliant on Apple, and also being focussing on a small number of products. This made the business less flexible and unable to react to the needs of new opportunities. When the apple fell from the tree, there does not appear to have been a back-up plan.
I also have seen this first hand in a large ‘start-up when I was involved in the formative years of one of Australia’s major telco’s. In the early stages of deregulation, the costs associated with connecting business and individuals to our network were significant. So much so that the business had to focus on major corporations. Despite having won the business of a number of these key accounts generating significant revenue (and creating a few headaches for the incumbent), there was always concern at the impact the loss of any one clients would have on our future success. A major focus of the business was to spread this risk by having a greater percentage of revenue generated though residential customers and SME’s. This meant a significant investment of time, money and human resources in developing network access, legal negotiations and development of financial platforms. Sure, it took away from short-term revenue but the investment was necessary. Without having the security of a bigger pot of revenue the business was vulnerable.
For any business having a plan to diversify and spread the rick is essential – we all know what they say about having all your eggs in the one basket.