What is customer concentration?

When a company’s revenue is heavily reliant on a single customer, or a small group of customers, that business may be considered to have high customer concentration. According to Forbes, your business could be at risk if 10% or more of your business’s revenue comes from a single client.

But why is high customer concentration risky, and how could you address this risk in your business? Read on to find out:

• What customer concentration is
• How to measure customer concentration
• Risks of having high customer concentration
• How to reduce high customer concentration in your business

Customer concentration, aka ‘client concentration’, refers to how a business’s revenue is spread across its customer or client base. When a large portion of a business’s revenue comes from a single customer or a small group of customers, the business may be considered to have a high degree of customer concentration.

A business is considered to have high customer concentration if a single client or customer accounts for 10% or more of its revenue. Similarly, a company likely has high customer concentration if 25% or more of its revenue is created solely by five of its largest clients.

When your business is reliant on a few clients or customers, your revenue is highly sensitive. The loss of 10%-25% in revenue can cause your business to drop from profitable to break-even and threaten its future survival.

To assess the customer concentration in your business, try following these steps:

1. Check your sales records to identify the customer from whom your business earned the most revenue in the last year.
2. Identify the amount of revenue that your business earned from that customer during that year.
3. Divide that amount by your business’s total revenue for that year.
4. Multiply that number by 100 to complete the calculation. The final number will be your customer concentration level expressed as a percentage.

If your business has had more than two customers in the past six months, and earned between 25% and 80% of its revenue from a single customer during that time, it might be at risk for a big drop in revenue when those customers happen to leave the business.

Many small businesses depend on a few big customers, which can be risky, especially in a volatile economy when losing that one highly profitable client is higher. Below are some of the reasons you probably want to avoid high customer concentration in your business:

1. The potential impact of losing just one customer can be far more damaging than it might otherwise have been when a business depends on a tiny client base.

2. Your business’s creditworthiness can be affected by a high customer concentration. For example, you may have problems securing loans with favourable interest rates if your business is too dependent on a small number of customers.

3. Suppose a key client becomes aware that your business is financially dependent on them. In that case, they may be able to use this to their advantage and attempt to drive down pricing, make additional demands of your services or even influence business decisions in their favour.

4. When it comes to selling your business or seeking investment, high customer concentration could leave your buyer or investor vulnerable. It may have an impact on the price at which your company is valued.

The best way to address high customer concentration in your business is to grow your business and diversify your client base. See our article What Is Client Acquisition for tips on how to get more clients.

But before you do that, you may want to think about how many customers your business can manage first. Ensure that you can keep up with an increase in demand while maintaining your business’s standards and a work-life balance that’s right for you.

We’ve listed four strategies for growing your client base:

Cultivating a network of industry contacts can be a valuable undertaking for a small business. Building relationships with other companies can help you get more customers through client referrals and learn about new opportunities. For example, a florist and a baker would recommend each other to clients when working on events or work together on projects that would be too large to take on alone.

Search engine optimisation (SEO) is the practice of optimising your website so that potential customers can find you when they perform web searches for products or services like yours. Check out our Beginner’s Guide to Small Business SEO for tips on how your business can benefit from an excellent SEO strategy.

A good SEO strategy will increase the visibility of your offering to potential customers and help your website rank higher on Google or other search engine results. It may seem complicated, but learning the basics of website optimisation could significantly affect your website’s performance. Learn more about how to create a business website here.

Social media platforms like Twitter or Facebook can be an essential digital tool for your business, as they allow you to reach out to both existing and potential customers. Instead of using all the platforms available, do some research to find out which would be the best fit for your business. 

Take into account the audience you need to reach, the messages you want to share, and how you want to engage with your customers. To ensure you can stick with your social media strategy, be realistic about the amount of time you are able to dedicate to it. 

To help hone your social media strategy, check out our guide on How to Successfully Market Your Business On Social Media. 

If your business provides a specialised product or service with a relatively small target market, finding new customers could prove to be tricky. If you can expand your business’s offering by providing a slightly different related product or service, it might be worth considering as a tactic for growing your customer base.

Financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.