Today I’m going to be talking about a situation that strikes fear into the heart of every business owner.
This is one of the biggest, and most dreaded “what ifs”… the stuff of nightmares… guaranteed to have you breaking out in a cold sweat.
What if… you lose your main customer?
Just hearing those words is enough to make most business owners spit coffee across the room.
Even if you’re one of the smoother operators among us who – when presented with this horrific suggestion – manages to keep their latte in their mouth… the person who posed you the question is likely to be met with unease, and poorly disguised paranoia.
(“Who have you been talking to? What do you know?!”)
Losing a huge customer is something many entrepreneurs have experienced, and in many cases, have been unable to bounce back from.
The benefits of honing in on one customer
The question of whether one or two customers should ever account for the majority of your revenue is not as easy to answer as you might think; opinions are divided – albeit not equally – across the global entrepreneurial community.
Generally, the risks associated with putting too many eggs in one basket far outweigh the benefits. But there are benefits to be had – especially where early-stage startups are concerned.
Focusing on one large customer’s needs allows you to fine-tune the quality of the service you provide, which in turn, lays the groundwork for a long, and fruitful relationship.
It also allows you to maximise operational efficiency, as you can tailor your service and cost structure to suit your client (which is especially beneficial when you’re still working with a relatively small team).
And let’s be honest, if you win a new client that will double your revenue overnight you’re not going to turn them down!
What about the risks?
On the flip side, the risks involved in putting too much faith in one client are considerable.
When one customer accounts for more than 30, 40 or even 50 percent of your revenue, your fate is essentially bound up with theirs. If they go under, chances are they’re taking you with them.
According to Forbes, a business is at risk if any one customer accounts for more than 10% of their revenue. Their research has shown that losing a customer that accounts for just 20% of your revenue can quickly lead to serious cash flow problems.
This makes total sense when you think that most companies are operating at a 10% or less Net Profit margin. That 20% loss can expose your overheads pretty quickly.
With this in mind, you can only imagine what last week’s guest James Leighton went through when – back in 2018, his business lost a client that represented a whopping 90% of their revenue.
And this client didn’t just take their business elsewhere, they went bust, while still owing James’ company a considerable amount of money. There was no cash left in the business; they were unable to pay their rent, bills, or staff bonuses.
James described this as an intensely emotional and distressing time both professionally and personally. As any diligent founder would, he felt a great deal of responsibility for what had happened, concern for the people who had been affected, and embarrassment, for not recognising the reality of the situation sooner.
Several years on, James’ business is doing well. In fact, it’s doing better than well, as he was able to leverage some hard-learned lessons for the benefit of his company and staff.
What to do when the basket breaks?
To return to the eggs-in-a-basket analogy… what do you do when the basket holding most of your eggs breaks? Here are some the insights James shared last week:
- When your gut tells you to be wary, be wary. In James’ case, the client regularly went 3 to 6 months without paying. But you can also watch out for high staff turnover or loss of a key contact.
- Don’t play the blame game or allow pent-up anger to get in the way. Focus on what you can control.
- Remember that setbacks can become strengths, if you deal with them correctly.
And finally, try not to catastrophize. Every moment spent panicking is a moment you’re not out fires. The problems will still be there by the time you have regained your cool, but they’re likely to be much worse.
How to minimise risk
Obviously, prevention is better than cure. Here are a few, final words from me to help you prevent a sudden revenue-loss disaster:
- The safest approach is to make sure your largest customer doesn’t account for more than 15% of your revenue.
- If possible, sign long term contracts with your major customers – so they can’t suddenly and unexpectedly switch vendors. Of course, this doesn’t protect you if the customer in question goes bust.
- Never stop looking for your next biggest client! Always have resources set aside to broaden your customer base. You’ve found one of your ideal clients already, imagine how great it would feel to have another 4 of them.
Remember that focusing on fewer customers can work well for certain kinds of business – you just need to make sure you’re choosing a watertight, ironclad, bomb-proof basket to put your eggs in.
For everyone else, happy hunting!