Many clients I speak to are looking for a home run or flagship clients. Their logic is since it takes the effort to sign up a new customer, why not sign up a few large customers vs. many small customers? However, this is a misguided goal of building a healthy business. Ideally, you would like many customers rather than a few large customers for the two main reasons: reduced risk and margin squeeze.
First and foremost is that if your one big account leaves, it can cripple or destroy your business. 3 years into my documentation and training company’s history, we had 2.5 million dollars in revenue when we won a 1.2 million dollar per year account. After leasing new office space, buying equipment, and training ten new employees, my client was targeted for acquisition and canceled the project halfway through the contract. We had taken on a lot of fixed expenses with the new lease and capital equipment.
We could not get out of these expenses without a huge penalty cost. Without the revenue from the project, we were bleeding cash. The cash flow hemorrhage brought our business to the brink of extinction and we only survived because we won a settlement from the client after a protracted legal battle. In addition to the effects of losing a big customer, a savvy big customer understands their power and can hold you hostage during price negotiations. Volume discounts translate into margin squeeze. Margin squeeze, in turn, lowers your profit margins, making your business less profitable and therefore less valuable. Ideally, no one client should account for more than 10% of your revenue.
What is the revenue distribution of your customers?
