Small business owners often fantasize about having a single big customer that buys a large volume of their products and causes less stress than many smaller customers would have.
But there are so many reasons why this fantasy might just turn into a nightmare.
The first danger of relying on a single customer or a few large customers for say 25% or more of your revenue is that the success or growth of your business is tied to that single customer.
Your ability to grow as a business is determined by their budget and what happens in their business.
And they know this, so in time, they would leverage their position to negotiate lower prices that may impact your profit and revenue.
God forbid that they go under or choose another business over yours, the impact of their loss on your business would be devastating.
Sometimes, even fatal as many businesses go under as a result of this.
Customer concentration or accounts receivable concentration is a measure of how your total revenue is distributed among your customers.
When a small business has a high customer concentration, it means that a single customer accounts for more than 10% of your revenue.
There are more disadvantages to this than advantages.
Some Disadvantages Include: –
- They determine your growth and success.
- They have enough leverage to bargain lower prices that may hurt your business.
- They also make it difficult for you to provide enough attention to your smaller customers since most of your resources would be channelled towards providing better services for them.
- Relying on a single customer would devalue your business when you put it up for sale; because of the big risk, it poses for the future of the business.
Of course, there are advantages of relying on a single or a few customers for most of your revenue.
One of such advantages is that your business can focus on providing better services to your customers.
Which helps increase the reputation of your business and foster a long-term relationship between your business and your customers.
Other advantages include: –
- The fact that your business can lower its cost of marketing and sales.
- Large customers bring in large amounts of revenue, which is very important to grow and sustain a business.
Now that you know some of the advantages and disadvantages of relying on a single customer, how do you escape from it?
Tactics for Escaping Over-Dependence on a Single Customer
1. Diversify! Diversify!! Diversify!!!
Diversification is the best strategy to break the over-dependence of your small business on a single customer or a few large customers.
Don’t wait until that single customer goes with a different business or goes under before you implement your diversification plans.
Start today and invest in your marketing and sales department.
Put in more effort to get new customers (suitably small to medium-sized customers).
Develop action steps to reach new customers by developing new products, customizing your existing offering to appeal to new customer segments, and expand your business to new locations.
2. Develop Strategic Relationships & Networks
Developing new relationships with other businesses and individuals is a great way to help diversify your business.
You can leverage the relationships and network you formed to enter new markets and leverage the customer base of others to reach more customers faster than if you have to rely on just your network.
This is one advantage of joining a small business mastermind.
It gives small business owners access to a network of customers that they can use to diversify their customer base and dilute the overdependence on a single customer.
3. Monitor Your Customer Concentration
What you don’t measure, you can’t improve.
Always monitor your books to determine when a customer is accounting for a large chunk of your revenue.
Many businesses don’t know if this is true in their case, because they just focus on whether they are making a profit or loss.
You could be making a profit today, and in the next month go under, because your business is over-relying on a single customer or a few large customers.
Monitor your books regularly and take action early enough to correct when your business suffers from high customer concentration.
Here’s What We Recommend:-
We advise business owners who want help to make sense of their books to sign up for our Accounting-As-A-Service.
Accounting-As-A-Service turns your Key Performance Indicators (KPIs) into information you can use.
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