Often, many SMEs start their business with a small customer base, if not with just one customer. Although it is normal to start small in the management of the business world and having few customers at the beginning is part of this gradual growth, maintaining this condition for a long time can be counterproductive for any of these companies.
<<< Management area: the importance of a planning tool >>>
This means that companies operating under these conditions are prone to various risks of having a single customer since profits depend on the purchases that this single customer decides to make permanently. But, what happens if the customer stops buying our products for economic reasons? The only source of income is interrupted, and that will mean a real danger of bankruptcy in the short term.
In circumstances like these, a change of perspective can save an SME from going out of business in a few months. Depending on a single customer, no matter how profitable it may be at the beginning, is too great a risk, because nothing guarantees their loyalty even if you focus your efforts on pleasing them and do not dedicate yourself to the task of attracting new customers.
For this reason, the premise of this article is to identify the main risks of having just one customer, so that your new strategy focuses on attracting new customers and not keeping just one.
Currently, many SMEs concentrate their efforts on a single customer from whom they receive the entire percentage of their billing. This reality leads us to identify a risk of overexposure to customers, in the sense that any adversity they suffer will directly harm the profitability of these companies.
The risk of concentrating all efforts on a single customer refers to the dangers associated with relying on a small number of large customers for a significant percentage of your company's revenue. A high dependency on a single customer can have multiple meanings and will likely vary for each business.
In general, most companies consider a high concentration when their main customer represents approximately 10% or more of their revenue, or when a quarter or more of their revenue comes from their only customer.
Reliance on a single customer can also apply to industries or niches. For example, your largest customer may represent 10% of your revenue, but if 75% of your customers are from a single niche, this also creates risk. High dependency is generally considered bad because of how quickly you can lose revenue if your big customers leave your business.
<<< 8 essential statistics in the management area >>>
Below, we've listed the most pressing risks of having a single customer and why you should avoid them.
A common risk of having a single customer is that the big customer you rely on for the majority of your income will stop paying. Businesses lose customers all the time for several reasons – it's common, and businesses can usually bounce back.
However, if you lose the big customer you trusted, your business will lose all the revenue associated with that customer. If your company loses a significant amount of money, you will also likely lose the ability to keep your business running.
The same can happen if a company's target niche is too small. For example, if your business specializes in a specific target market, the customer segment you will reach will be limited.
This leads to dependency on your customers and loss of significant amounts of revenue if they suddenly decide to work with a different provider. The biggest danger here is that you won't be able to pay your employees or keep your company solvent, which will result in liquidation.
When customers have such a big influence on your income, it's natural to want to do everything in your power to please them. However, this can quickly turn into a trap. It is common for large customers to request changes to your products or demand that you customize something for them.
Although this is normal, since they are initiatives that are usually decided by companies, you can quickly get caught up in a cycle of changing plans on behalf of your customer. Once you make changes based on a customer's product plan, it's hard to find your way back to what you originally envisioned. When this happens, creating the freelance business you set out to build becomes that much more difficult.
Large customers have a certain amount of power over a company due to the amount of money they can pay or take from you. When you give customers this kind of power, they tend to take advantage of it. They may try to pressure your business into lower prices or make other exceptions on their behalf that will ultimately result in your business losing money.
An often-overlooked risk is how having a single customer can affect the value of your business. Potential buyers and investors will view this loyalty to a single customer negatively. As such, buyers are likely to be affected by the compelling challenge of sustained spending at your business.
Another risk associated with your customer taking over your product plan is managing your resources as a result of the changes. With larger customers, it's common to feel like you have to meet their needs, causing you to divert your resources and talents away from the primary focus to serving your unique customer's goals.
If your company has the proper resources to do so, it may not be a problem. With a more evenly dispersed customer base, your risks will be lower and your products or services can be more valuable to investors and buyers.
Unfortunately, for businesses with fewer resources and SMEs, diverting their resources takes their attention away from smaller customers. As you focus more on the single customer, you may lose smaller customers. If you end up losing your only source of income, you run the risk of going into debt or going out of business.
Being aware of the risks of having a single customer is the first step to avoiding them in your company. The best way to make this possible is to vary the size and number of customers. Having several smaller, more diverse customer segments is more beneficial than having just one or two large ones. Some ways to accomplish this include:
<<< Business management: Why do we do what we do? >>>
In short, to avoid the risks of having just one customer, the best alternative is to have a diverse customer base, so that if you lose that customer, the blow to your income is reduced, because your profits are more evenly distributed among your other new customers.
Achieving diversity of customers can be very favorable for your company, especially if it is growing. This does not mean that you should lose your only or first customer because you have many, but that your efforts are better distributed among a greater variety of customers and needs.