[Authors note: I originally wrote this blog back in Feb 2020 with the intention of scheduling it's publish in late March. With the advent of CoVid-19 pandemic, however, it got pushed out, but you will notice that the advice within this blog is a great reminder of how small business owners should prepare for next time!]
Diverse eggs, that is. You don’t want too many of one kind, one size or one type. And you definitely want more than a few. Stockpiling eggs for business growth is essential, because you never know when you’re going to need them.
What would you do if you lost 25 percent of your clientele, or your top three clients suddenly dropped off the face of the planet?
While you’re asking questions of yourself, ask these too:
- Is a large percent of your business coming from a single referral source?
- Are you planning for the future?
- What if your market takes a downtown?
- Are you planning to head stuff off?
- Do you have a rainy day plan?
I had a friend who had most of his work coming from only three sources. I kept telling him, not enough eggs, but when he lost one source, his company lost a third of its revenues that year. Needless to say, this put his plans for expansion on a back burner. In one day, he went from a bright future outlook and plans for expansion to fighting to keep his company alive and laying off employees.
He wasn't a client of mine; he wanted free advice, which he happily ignored. People do that with free advice all the time. They think “it's free so I don't have to take it.” They have no skin in the game. If he had been a client, I would have charged him for that advice and he would have taken it or wasted his money.
A lot of companies hire a business coach because they think they are doing well and they can push to the next level, and then get frustrated when they are told to first get their house in order.
If you want to move your business to the next level, you need to get your ducks in a row and make sure your company is ready to handle that next level. It's not just about getting more clients, it's about knowing your company's current capabilities and capacity, and then scaling them for growth.
Over-Relying on a Few Big Clients
One survey of tech entrepreneurs found that among small businesses, 42 percent generated more than half of their revenue from one client. That’s an awful lot of faith to have in your top guys. Hey, we get it: a client with deep pockets sounds amazing. You can keep dipping into the well for all that life-sustaining water, without having to waste your time looking for new work. It’s sweet. Until it isn’t. When a client drops you, it happens like a swift kick to the gut. There is often no warning, so that what you’re faced with are the tough decisions. How will you make your bills this month? Will you have to let anybody go? For that matter, how will you make your own mortgage, pay your kids’ tuition, etc.? Panic sets in.
You may not realize it now that times are good, but relying on one large client comes with serious risks, including:
- The client could leave and take a large chunk of your revenue with them.
- The client may demand you change your product and service to fit their needs.
- You may spend so much time and energy serving one client that you miss out on other clients that would pay out more over the long haul.
Obviously, for you as a small business owner, a relationship with a big customer carries weight that goes beyond just financials. A partnership with a well-branded customer not only persuades others to come on board, it also paves the way for a very financeable receivable for your business, says Inc.
But customer concentration, AKA over-reliance on one or a few large customers, can have serious drawbacks for small companies like yours.
Here’s a likely scenario. Maybe you’ve already experienced something like it:
Your big fish customer suddenly pulls an order. You miss your plan for the quarter or even year, you have to slash expenses and, inevitably, you have to lay people off or take less money home for yourself. Keep in mind, big customers also tend to use their size to justify slow payments, changes to delivery terms, or renegotiated prices.
But don’t underestimate the effect a big customer has on your entrepreneur’s mindset. You may catch yourself building your entire company around keeping that one big customer happy. What happens next is inevitable. If that large customer pulls out, it will effectively destroy your business’ working capital.
Solving Customer Concentration
Customer concentration is not a simple problem to solve, but here are some ways you can slash a bit of the risk that comes with relying on a few big players:
- Understand who your potential customers are and their industries. Determine what factors would cause a customer not to pay. If you aren’t sure if your clients are close to bankruptcy or are in other financial hot waters, you have yourself a problem.
- Position your company as something that is needed by your customers, not just a “nice to have.” Building yourself into the supply chain makes it more difficult for customers to ditch you.
- Take a good look at your contracts and length of engagement, which can offer good opportunities to mitigate risk.
- Diversify within a customer as soon as you can, and refrain from tying your relationship to any single contact or buyer. Remember: you always need multiple champions inside your client company that you can depend on to be your advocate.
- Focus on profitability rather than revenue. Understandably, revenue can be all-consuming for a small company. But the ability to measure the profitability of a relationship is critical. The risk you take on by catering to one large customer should be reflected by greater profitability from that single account.
Is the Big Fish Always the Best Catch?
While serving a few large clients is OK (they provide excellent learning experiences you can use to build your company), each client should represent a proportionate percentage of your revenue, says Forbes. When you start to depend on a couple of major clients, you’re just a few bad decisions away from bankruptcy.
Just like in sports, it's about game prep. You don't just walk out on the field and expect to score five goals. You have to have a plan, a line-up, a what-if for the two goals down in the first 15 minutes.
What's YOUR "what if" plan? Don’t have one? Call us.
All it takes is a free 30-minute consultation with one of our business coaches to set you on the right course and adjust your mindset for success.