There should always be concern about customer concentration. Some say be concerned if one customer is 10% of sales and others say up to 25% is okay (for certain industries). But these arbitrary numbers are just that – numbers.
Customers are a top value driver and there’s more to it than concentration. The following are more important than the percent of sales from top customers.
- Relationship – how loyal are the customers (and why)? Who is the loyalty to, is it the firm, an employee, the owner? I remember a company with a 25% customer who had come to the firm when the GM was hired from a competitor. Think they’d move with him again? On the flip side, a client has a symbiotic relationship with their top customer. They are so ingrained it would hurt the customer more to leave than it would our client.
- Pricing – competitive pricing with on-time delivery, top quality, and thus overall value is a solid benefit.
- Sell more – let’s flip the concentration thing upside down. It’s a lot easier to sell more to existing customers than find new ones, by a factor of 6X or more. Great customers will want to do more with you if you give them the chance.
The goal is loyal customers who want to do more business with you.
“We’re here to put a dent in the universe. Otherwise why even be here?” Steve Jobs