I know you’ve heard the phrase, don’t put all your eggs in one basket. But that is exactly what you are doing when you have a high customer concentration.
Customer concentration is when you have too much revenue coming from one or a very small number of clients or customers. It could also come when you have the customers in a very narrow industry, particularly one that could be hard hit by changes in the industry, due to technology advancements, changes in regulations, or other major disruptive forces.
Let’s take a look at how customers can be concentrated, what I’ve done to reduce the concentration risk in the past and right now, as well as how we are seeing this risk play out right before our eyes right now. Then we will start a game plan for you to take action in your own business.
The Problem with Customer Concentration
See, the problem with customer concentration or the fact that one customer was such an outsourced part of the company’s revenue is that it made us vulnerable. Vulnerable to their demands and wishes.
When it came time to negotiate the annual contract, they knew they had us over a barrel. That we couldn’t afford to turn down the rates they were offering. They had all the negotiating power because if we played hard ball and they left, we would be facing complete ruin.
They were also a major player in the industry, so if we lost them as a customer, word would get out. Others would be questioning why, building a bad reputation for the company.
And you don’t even have to assume that the will use that leverage to harm you. It could be that the company goes out of business, so you lose that business. Or they get bought by another company and already have someone fulfilling your goods or services, so you lose that business. Or that pressures will force a major change to an entire industry.
Harder to Get Financing
Once you decide to grow, a lot of business owners will look for financing to be the fuel for that growth. But at a certain point, they are going to look beyond the credit score and income of the owner and look at the business’s foundation. The lender’s key question is “will this borrower be able to repay this loan?”
With a higher customer concentration, the bank knows that the customer has the power and can leave you high and dry without much notice. That means that there is a greater likelihood that you won’t be able to repay the loan.
Now how that affects your financing can vary. It can mean a higher interest rate, costing you money. The bank could limit how much they borrow, so if you go under, the bank isn’t left holding as big of a bag. If it is bad enough, especially if combined with other factors like poor credit by the owner, they could even deny the loan entirely.
But as you grow your business and want to get away from owner personal guarantees, it is important to reduce every risk factor. And this is a big one that banks look at regularly.
It’s a Red Flag for Investors, Buyers
If you are looking for investors or buyers for your business, you should be aware that one of the issues that they will look for is the customer concentration. In fact, it is often one of the first things that they want to look at.
Having a high concentration will often result in lower enterprise values because the professional investors and buyers, or at least their advisors (like me) know that this is such a high risk. This means less money for you as the founder or owner.
Customer Industry Can Also Be A Problem
You may be thinking that you are fine because you have a lot of customers. But what if they are all concentrated in one industry?
This is also a major risk. Because we’ve seen major impacts that affect entire industries. Think back to the COVID days when you couldn’t travel. That whole industry was in dire straights for a long time. Vendors and suppliers serving the travel industry lost a lot of work during that time.
Or now with higher interest rates and tighter supply issues, real estate agents may not be making as much. Add in a legal change to their commissions and you’ve got a lot of agents looking for a new career.
Niche, But With Caution
So if customer-industry concentration is a risk, is it still worth serving a niche?
I say yes!
But be aware of the risks – select industries that are robust and can survive down cycles and up cycles. And spread it out across geographical areas and even sub-niches.
For example, while I work with a lot of law firms as a Fractional CFO, my firms are spread across the United States and even Canada. Also, I work with multiple practice areas with different business models – from personal injury to criminal defense, business law to immigration, bankruptcy to family law.
So even if say tort reform dramatically impacts personal injury law firms (like they are trying to do here in Georgia right now), Springboard Legal can survive and thrive with the firms from other practice areas. And some practice areas have a pretty good inverse correlation – when one is up, the other is down. Like bankruptcy and estate planning.
This means that I can take a higher number of law firm clients without the customer concentration risk compared to say a Fractional CFO that only specializes in personal injury firms.
And it helps that I have other industries, beyond legal, that I also serve. This helps me to stay sound in my own advice (ever heard of the cobbler’s kids having no shoes? Sometimes it is easy for us to give advice but not follow it ourselves)
See Also: A Guide to Law Firm Disaster Preparedness
Customer Acquisition Concentration Also a Risk
Did you freak out earlier this month when Google started removing a bunch of reviews from your business? I know a lot of law firms did.
They freaked out because they rely so much on the Google ecosystem for customer acquisition – SEO is boosted by those reviews. Ads convert better with more reviews. Etc Etc Etc
That’s why I recommend that businesses have multiple ways of acquiring customers and don’t rely on just one method. So instead of getting all or most of your clients from Google ads, you can be focusing on making other search engines happy/SEO. You can be active on social media. You can build an email list. Focus on existing and former clients referring new clients. And then there is all the offline stuff you can do – print advertising, sponsoring Little Leagues and sports leagues, throwing open houses, billboards, etc.
A good philosophy here is the 10×10. No more than 10% of your revenue from each of 10 different sources. That also makes the multi-channel attribution marketing guys really happy. But you are reducing your risk that any one channel tanks on you and you no longer get customers from that marketing source.
Diversity in All Ways
Back when I was in-house, I started a corporate initiative that I called “Diversity in all ways.” It went beyond the typical employment related diversity issues, it also included bigger picture diversity risks for the company.
Some of those bigger picture risks included things like geographic risk: was this area suitable for continued growth in customers, employees, office space? Were there weather factors that made it risky to be in only one location? Was it politically stable for our type of company or would state or local officials decide that we weren’t a favored industry?
So we opened three more offices, across the country to spread out some of that risk and allow us access to new talent pools.
Another area that we focused a lot on was customer diversity. Because they had 80% of the revenue tied up in one customer.
I remember having a conversation early on in this initiative with the Director of Operations. I laid out the plan: grow this account while also growing all the other accounts AND getting a ton of new accounts. He looked at me like I was asking the impossible. It wasn’t, but it would take a lot of hard work to make the change.
After about a year, we had drastically changed the customer concentration risk, where that large customer made up only about 55% of the revenue, after we onboarded new large customers and in different industries too. 55% was still too high, but it was moving in the right direction.
It’s Playing Out Right Now in 2025
We are seeing the customer concentration risk play out right in front of us here in 2025.
You know all those government contracts that are being canceled? For many companies, the U.S. Federal Government is their largest customer, by far. Sometimes, the U.S. Government is the only customer.
Would you want 100% of your company’s revenue being at risk right now?
Now some services may be limited to government, but can you diversify your customers somehow? Does your service or good a fit for local or state governments? What about international customers? (Although you’ll have to be careful with all the export restrictions and government contract entanglements – guess you’ll want a lawyer for that, right?)
Can you make some tweaks to make your goods or services applicable to a private business market? Consumer market?
I get it – this is a major change. For decades, the Federal Government has been seen as a really stable customer. But nothing about the present circumstances screams stability. Even for the largest of companies.
What You Should Be Doing About Customer Concentration Risk Right Now
The first step is realizing that you have a customer concentration risk. Start by analyzing your revenue over the past 12 months (or since we are still so close to the beginning of the year, just look at last year’s numbers). Does any one customer take up a significant portion of that revenue?
What does a significant portion mean? Give me some numbers, damnit!
Well, I can’t. Because that is a big fat “It Depends” answer. For some companies, having 25-30% in one customer is a risk. For others, it can be as little as 1%. But a good rule of thumb is any customer or client making up more than 10% of your revenue or 33% by industry. The smaller those numbers go, though, the less your risk.
Once we know we have a problem, then we need to start efforts on fixing it. Depending on your business, this can be a very quick thing to fix or a long-term effort. All depends on your sales cycle.
But the key here isn’t to go and fire big customers. The key is to add new clients and build those accounts. Add new industries. Add new sub-niches. Add new marketing sources.
Remember, this is a long-term process, where we want improvements every cycle or period. We do not have to reduce the risk to zero overnight. We can celebrate each new customer that reduces are risk even marginally.
Want help diving into the customer data? Can’t take on yet another project like this and still get your work done?
Springboard Legal can help! Contact us today to see how we can work together to reduce your customer concentration risk as well as other risks and put you on the path to stronger business for future growth!