I have a simple, yet valuable piece of information to share with you today. If you take this information and use it, it will help you build a strong foundation for your business AND help you avoid one of the most common, serious and avoidable business mistakes possible.
The challenge: A narrow spread of business
Many small businesses rely way too heavily on a small number of clients or customers, for a large percentage of their income. This leaves them in a horribly exposed position. It’s known as having a narrow spread of business.
You need to avoid putting yourself in this precarious position. Here’s why.
OK, the obvious reason first: If a client that you rely heavily on for your income goes broke (or picks another provider), you could see your turnover suffer enormous damage in one foul swoop. If you rely too heavily on that client, you could go broke – I’ve met many, many business people this has happened too.
I once asked a room full of businesspeople, on a show of hands, how many of them relied on fewer than 3 clients or customers for 50% of their turnover. Most of the room put their hand up. I then asked if anyone relied on 1 client or customer for more than 50% of their business and around 30% of the room put their hand up.
But there’s a second, less obvious problem with relying on a small number of major clients for the majority of your revenue / turnover. It gives them too much power over you, if they are aware of their importance to your finances.
In fact, I was prompted to write this post after speaking recently with a businessman, who went bankrupt last summer; due to the massive influence 1 client held over him and his business.
He had one client for his web design business, who was responsible for over 70% of his turnover. Most of his employees worked exclusively on this one client’s portfolio of websites and associated work. The client soon realised how big a part of this guys business they were, so they decided to renegotiate their fees. They used their enormous influence to get all their work done for a peanuts and eventually, there was too little profit to make the project viable. The web design company owner then tried to renegotiate, but from such a poor position, he had no success.
Having already had to make 30% of his workforce redundant to accommodate the drop in income, he was no longer able to effectively service this major client (or his other clients) and in just 12 weeks he had gone broke.
An obvious answer to this problem? Not really!
On the surface, it seems there’s an obvious answer here. Just ensure that you have a larger number of clients, which you treat equally superbly; none of which are responsible for more than a moderate share of your business’ overall income.
However, here’s where it gets tricky and why so many intelligent businesspeople get caught out: In most cases, these ’super-size clients’ were not super-size clients to begin with!
They were regular sized clients that developed a greater and greater requirement, until they slowly became a huge part of the income for the provider’s business. The danger here, is that this kind of thing often happens so slowly, that it’s a problem before you realise it. It’s also pretty tough to see all that extra income flowing into the business and regard it as a potential problem!
The answer?
There’s nothing wrong with developing your clients, so that they become more financially valuable to your business. In fact, it’s a really good idea. Just make sure you never over expose yourself, by relying too heavily on a few key clients. Try and develop all your clients as evenly as possible and work on as even a flow of income through them as you can.
So, if you are currently too reliant on a small number of clients, I suggest you immediately focus your marketing efforts on developing additional sources of revenue for your business. Only by having a wider spread of clients can you plan ahead with confidence.
What do you think?
Have you experienced anything like this or do you know of anyone that has? Please share your feedback or experiences with a comment.
Image credit: JB London
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Two comments:
1. The business that “renegotiated” the web provider out of business quite likely lost money in the long term once they had to find a new web provider. As a tech person, it’s almost always a nightmare coming in behind something like this, and costly for clients.
2. Overhead doesn’t scale very well. Fewer clients means more billable hours per time spent on overhead. With the obvious risk you have explained very well here. Tough one.
Thanks for the feedback David.
However, I disagree with your second point. In fact, none of the world’s most successful businesses use the ‘fewer is best’ model. With scale comes economy. Forget the giants like Ford, Microsoft, Google, Apple Inc (who have millions of customers) – Even small businesses that have figured out how to scale their business successfully are massively more effective than those who get stuck with 1 or 2 high value clients. I can’t think of a single investor that would pump a penny into a business with too few clients.
That’s my experience, anyway.
@Dave
IMHO A business with a handful of clients is not a business, it’s an outsourced employee with no financial security.
My brother’s business went bust in a eerily similar way to that guy in Jims story. Hes rebuilt with a larger number of equally cool clients and its worked great for the past 4 years.
Great post and comments guys.
Thanks
Hi Jim
This I can particularly relate to…
“It gives them too much power over you, if they are aware of their importance to your finances.”
It can be a real relationship problem , creating fear and tension, don’t you think? Well at least- that’s my experience. 2010 will be marketing year for me so I will continue learning from your insights. Thanks!
Glad you are still finding the blog useful Yael, thanks!!
The relationship angle of over-influential clients is something that can produce a stack of problems. It’s just way easier to avoid it before it happens.
If it’s already happened to a business, they need to think about quickly addressing the problem and getting the right balance back to their business.
Thanks – I enjoy the swift feedback, Jim. I’ll be back….:-)
It’s a fine line sometimes. How many times have you heard “Would you rather have 10 clients paying $100 or 1000 clients paying $1?”. Sometimes less is more, except when less is too little.
A bigger issue many times is a small business relying on one vendor too heavily… If they go under or change drastically, you can be in dire straights quickly… We’ve seen this many times with some of our ecommerce clients. The “workaround” here is to have a backup plan, and make sure you know your vendors well before hitching your wagon to them.
Good point Rob, but remember; McDonalds did pretty good with customers paying just a few bucks for their product! That model works brilliantly, when used correctly.
Thanks for the comment sir.
True. It depends on the type of business I guess. In the service industry where you have recurring clients, less clients = less headaches many times. In a commodity or product driven business, volume is always good.
Although, in my town, there is only one McDonalds, but at least 25 small restaurants. It’s tough to compete with the big kids on a low price, volume basis (unless you have great marketing… *wink*).