scaling emerging growth companies | Strategies to improve business profitability | advice for company growth
In the last two posts in this series, I discussed key account management as a revenue growth strategy and presented a step-by-step approach to building key accounts. It is important for emerging growth companies to identify, penetrate and widen their sales to customers they target for growth.
But it is just as important for companies trying to get out of No Man’s Land to think defensively about avoiding setbacks with their existing customers.
Two Key Risks Emerging Growth Companies Should Mitigate
Avoid Customer Concentration
Anyone who assesses the value and risks of your business—because they are considering acquiring or investing in you or helping you raise capital—will evaluate your risk of customer concentration. This is a particular problem with earlier stage companies, which are often inclined to “cruise” on one or more relationships that the founder creates with his or her personal connections and rapport. Growing your business in this way can conceal many vulnerabilities. These include a lack of channels into different parts of your end customers’ organizations that are deep enough to withstand changes in personnel and operations at either end of the relationship.
When key customers experience a business downturn, they will be quick to reevaluate their suppliers. Thrust into a defensive mode, they may go from being services-driven to being cost-driven in how they evaluate you. If you lose a major customer it will be hard to ramp up other customers fast enough to make up for the revenue you have lost. It’s even harder to do this if, in a drive to cut costs yourself, you have recently reduced the number and quality of your sales force.
There is no substitute for constantly developing a pipeline of new customers and prospects. Avoid getting tied down to providing only one category of goods and services to only one or a handful of customers.
Be Ready For a Vendor Review
A shift in your customers’ fortunes can leave you exposed to pressures you haven’t experienced from them before. They may bring in a professional procurement consultant, who has promised to reduce their purchasing costs by as much as 10% or more. The consultant’s first step will be to do spend analysis and see various opportunities to reduce your customer’s costs. Be ready to have your performance numerically “scored” and ranked by categories such as on-time delivery or quality. They may seek to reduce the number of vendors to a relative few and get concessions from those it chooses to go forward with.
If you make this cut, you may be asked to share data about your costs—so they can require you to shift your pricing toward cost-plus. You may be asked to grant volume- based or category based rebates. They may insist you maintain “safety stock” to fill their unexpected needs, creating a drain on your working capital. They may look for you to change your order and fulfillment processes to conform to their requirements or improve your quality standards. All these steps may be worth it to you in the long run. But in the short run they will tend to depress your margins. Be ready for even your most satisfied customers to want to scrutinize your pricing and performance for tangible evidence of the value you are providing to them.
In the next and final article in this series I will take up converting from a “products and services” to a “solutions” mindset.
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About the Author
Devesh Sharma has an impressive background in international corporate strategy, operations and M&A. His earlier background includes management positions in charge of IT, e-commerce and international operations. Learn more or contact Devesh directly here.
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