Lots of eggs, one basket: The dangers of customer concentration
There’s no denying that having one large, dependable client has its benefits: you have just the one point of contact you work well with, they (hopefully) pay you consistently and on time, and you know exactly what they want from your product or service.
But on the flip side, there are horror stories about small businesses collapsing when their biggest client unexpectedly pulls the pin, like the Sydney cleaner who had to sell his house after his only customer (a large fast food chain) allegedly cancelled its cleaning contract with him with just 24 hours’ notice.
As such, Brad Turville, business development consultant and Director of BJT Financial, says it’s important small businesses take steps to ensure they’re not relying too heavily on one particular client.
“In micro-businesses, this is very common. You get going, you crack a relationship with someone, they start giving you a lot of work, you keep sending them invoices and getting paid,” he says.
“If nothing goes wrong, it can be fantastic. But you need to be aware that there is a risk and if something goes wrong, it can go terribly wrong.”
Is your business over-reliant on one customer?
Turville says there’s no magic formula or benchmark around how much of your business should depend on one customer, as businesses come in all shapes and sizes.
“But a litmus test to determine your level of risk would be to ask yourself: ‘If a particular client left tomorrow, would my business be in trouble? Would I have extreme cash flow issues?’”
It’s a situation registered BAS agent and founder of Virtually Virtual, Korryn Malzard, knows all too well.
For five years, she worked for one main client, with only a few additional clients here and there.
“By the end, I was feeling very much undervalued. I was too invested, but I knew if we suddenly parted ways, then I would have to start all over again,” she says.
“Fortunately, around mid-last year, I managed to land another big client and that gave me the kick I needed to make some changes to my business.”
The benefits of multiple customers
The most obvious benefit of increasing your number of clients is diversification of risk. But there are plenty of others.
Malzard says by balancing out her business to service 10 large clients – instead of just the one – it’s allowed her to set her own bar.
“Having multiple clients gives you leverage and the confidence to say: ‘I know what my business is worth’.”
Turville says another advantage is it gives you multiple channels and relationships to tap into.
“That gives you the potential for multiple referral generation channels. If you’ve got one client, you can only ask that client for referrals. If you’ve got 20 clients, you can ask 20 different people,” he says.
Steps to mitigate your risk
So, how do you go about finding more clients? Well, your first step is to review your current business model, says Turville, followed by working out what an ideal client looks like, and who would fit into that model.
“With your business model, you need to figure out the specific products and services you want to offer,” he says.
“You also need to work out a business strategy for the next one to three years. That could be something like how many clients do you want to work with? And how often do you want to transact with them?”
How Malzard transitioned Virtually Virtual is a case in point.
In 12 months, she went from working on an hourly rate with one major client – where she was often not billing for time worked – to a monthly package model, which has been taken on by 10 businesses.
Once she knew what her ideal client looked like, she targeted them online and at networking events, listed her business on Word of Mouth, and helped out other businesses in social media business groups.
“So rather than going in for the hard sell, I instead provide useful information. Not just one-line tips – actual in-depth information,” Malzard says.
Turville adds that another way to build your client base is to leverage off the work you’ve already done with your main client through case studies, testimonials and a recommendation on LinkedIn.
“Go for anything that’s going to have some good marketing juice. Everyone loves seeing a testimonial from a big fish,” he says.
“That’s something you can then use to approach either similar-sized or even smaller clients in a similar industry.”
It might sound like a bit of a cliché, Turville says, but make sure you spend time this year working on your business rather than just in your business.
“Otherwise, you’ll just be busy doing the work and sending the invoices rather than growing your business,” he says.
Another key tip he has is to stand your ground.
“You know what you’re worth, you know why you’re in the market and the value that you contribute.”
Turville says setting boundaries and effective ways of working are important, even when dealing with a key client.
Finally, while mitigating your risk is important, be careful not to spread yourself too thin by taking on too many new clients at once.
“It can sometimes be a fine balance. If you go over the top, get too diluted and your main client decides to ramp things up, you’ll find yourself with a capacity issue,” Turville says.
“So be mindful of being able to deliver on capacity and ensuring your business’s growth can keep up with it all.”
As a small business owner, you’re no doubt used to being run off your feet, but it’s important you know how to draw a clear line in the sand in order to protect your mental health.View more
Subscribe to the Prospa Blog
Be inspired! Sign up to Prospa’s newsletter to receive tips, tools and small business success stories straight to your inbox.