Do You Have Client Concentration Risk?
It is risky for any business to be too dependent on one or two clients. If these clients decide to leave and use the services of another company, it could cause significant challenges for the cash flow and continuity of your business. This is known as a client concentration issue. So what is client concentration?
Client concentration is a measure of how total revenue is distributed among your customer base. A company serving a large number of small-volume customers has lower customer concentration than a firm where a handful of large customers account for the majority of its business.
How do you know if you have a client concentration issue?
- One of the ways to measure this is if any single client accounts for 10% or more of your revenue or if your largest five customers make up 25% or more of your revenue. If this is the case, you have high client concentration which could be a potential issue.
How do you mitigate client concentration risk?
- Increase sales to other clients or new markets. If you do this, make sure that you have the infrastructure in place to still maintain the level of service. Many firms grow to mitigate the risk but then compromise on the quality of the service they deliver. - Enhance your relationship with your client, so that you are not easily replaced. - Provide enough value so that the client needs you and your product/ service. - Have relationships with a few people in your client company who can advocate for you if necessary.
Make sure that you monitor client concentration as part of your Key Performance Indicators (KPIs). Instead of waiting for it to become an issue, mitigate the risk by taking a proactive approach.