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!
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.