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 when scaling.
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 a founder goes through when a client that represents 90% of their revenue suddenly disappears.
And this client didn’t just take their business elsewhere—they went bust, while still owing money. There was no cash left in the business; bills, rent, and bonuses couldn’t be paid.
It’s an intensely emotional and distressing time, both professionally and personally. As any diligent founder would, you feel a great deal of responsibility for what’s happened, concern for the people affected, and embarrassment for not recognising the reality of the situation sooner.
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 key insights:
- When your gut tells you to be wary, be wary. Consistently late payments, high staff turnover, or losing a key contact are all red flags.
- Don’t play the blame game. Focus on what you can control.
- Turn setbacks into strengths. The experience might help you prevent something worse later.
- Try not to catastrophize. Every minute spent panicking is a minute not spent solving the problem.
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 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 four more.
- Focusing on fewer customers can work well for certain kinds of businesses—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!