Among the biggest business risks is having your sales concentrated in only a few customers. Lenders, investors and prospective buyers of your company are sure to look hard at this issue. How have you seen well run companies take steps to diversify their customer base?
Jeff Cornish has a history of providing strong leadership as a CEO and President of fast growing and successful companies.
His experience spans industries as diverse as transportation, retailing and restaurants. As President and CEO of Performance Transportation Services (PTS), Jeff led a company with the second largest market share among vehicle delivery companies.
"I think a lot of companies realize they need to diversify. But they find difficulty in doing so. The big customers worry about them disclosing information to competitors. It takes a lot of effort to get more customers, and this often drains the resources needed to serve existing customers. Well run companies diversify with a measured effort. Others just throw labor at the problem without a plan."
Kim Denney is an experienced Houston area leader with a record of solving top-level problems as an executive with broad responsibilities in the Chemical, Petrochemical, Energy, and Manufacturing industries.
"The first step is always to measure your risk. Have you looked at your customer concentration? How about your vendor concentration? A portion of your sales to the same entity risks that they will either stop buying from you or they could stop paying you for material or services you've already sold. With customers or vendors, you need to know where you stand today and understand the risks involved in your relationships. Sales to a Fortune 50 company should have a lower risk of not being paid, but even those giants or their subsidiaries can declare bankruptcy. Well-run companies check credit risk before taking on a customer or a key vendor, and they check it routinely thereafter - at least annually. Another best practice is to measure the customer and vendor concentration, then set targets and hold employees accountable. Typical targets might be to assure that no customer represents more than x%, say 20%, of your sales, and no vendor supplies over y%, say 70%, of a key item so that you have back-up. These percentages will evolve as the business evolves, but higher percentages represent greater risks and the company should be looking to reduce risk where it can." 
Michael EvansAs a partner with Ernst & Young, Mike developed, led and drove significant growth in a number of practices.
He created, grew and led, as Global Director, the firm’s Real Estate and Construction Industry practice from 1988 to 1998, managing 2,500 professionals and personally serving many of the largest international real estate organizations in the U.S. and around the world.
"The classic, sage advice to entrepreneurs is to diversify your customer base. But doing this can be hard. Large customers usually negotiate hard to get a better price, reducing your margin. Companies are prone to convincing themselves that they will deal with this by "losing money but making it up on volume." This self-deluding approach generally means that your large customer contributes to your top line revenue—while negatively affecting the bottom line. In this situation small customers can actually be funding their big competitors. Reliance on larger customers creates risk because they are the ones that are sought after by other suppliers and can readily switch. Companies are generally better off trying to diversify by adding a larger number of smaller customers."
Ferey FaridianFerey is a senior strategic investment professional with 25 years of experience spanning management consulting in 12 countries, investment banking and principal investing, as well as serving as CEO/President of high-technology ventures.
"The first step is to realize there is client concentration and that there is risk to be mitigated. Mitigating strategies boil down to boosting business development. It is ultimately the only way to go for client diversification and involves reviewing competencies and scoping the market and technology base for new areas to expand into. Look at markets adjacent to your current line of business. Innovate with new products/services. Stay aware and ahead of the competition. Diversify by type of revenues, for instance adding a service line to a product stream or looking for new types of clients for instance commercial vs. military, government vs. private sector, or international vs domestic, wholesale vs retail. Think about integrating backwards or forwards along your supply chain, which may also mean looking at M&A opportunities, growth strategies and/or exit planning."
Bill HeermannBill has deep expertise in building and running industrial manufacturing and construction companies.Most recently he was President of Precision Industrial Contractors, which serves the industrial construction market.
"Acceptable customer concentration metrics vary significantly in business, governed by the company’s products, services and market place focus. You would expect a large project contractor to be comfortable with a higher customer concentration than a local food retailer.
Most importantly: recognize the importance of the existing relationships and work to solidify those bonds before casting a broad net in search of someone new. Invest in making the existing relationships strong, vibrant and long lasting. Do not put at risk a relationship that is currently very vital to the company’s success. Start by identifying relationships that currently involve a single point of contact on either side of the relationship. You must diversify your interactions with the customer. Interact with as many members of the client’s management as you can, expressing gratitude for the business, searching for areas to improve your value add to them. Maybe most importantly – seek new business opportunities relentlessly with existing clients. Value the business relationship and make sure it is profitable for both parties.
Minor amounts of customer diversification may occur organically, but significant diversification requires focused effort. Management must communicate the need for diversification throughout the company. Pull the team together to brainstorm, evaluating opportunities and channels for diversification. Crystallize your understanding of the company’s capabilities, creating a broad assortment of growth and expansion opportunities. Analyze multiple paths for growth, evaluating each for its cost and potential contribution to the business. Validate the timing to achieve the targeted diversification, while considering possible negative impact on your company’s culture or your relationships with other customers. Throughout the search for diversification, do not fall into the common trap of focusing entirely on revenue increases. Profitable growth is what you need.
You may elect to tackle easy, natural expansion targets, as simple as contacting new customers with an identical product need. Greater de-concentration stability may necessitate choosing a complex, longer duration, or capital-intensive plan. It’s at this step in the process that superior performing companies begin to out distance the competition. They establish the plan for diversification, backed by internal communication. They fund the steps to achieve the objective, with both capital and people resources. Progress is measured and communicated, while course corrections are reviewed and applied. Customer diversification becomes a company-wide objective."
Tom HenricksTom Henricks began his four decades in aerospace as a fighter test pilot in the U.S. Air Force before being selected by NASA to become an astronaut. After leaving NASA, Tom has held a series of senior level positions in the aviation industry.
"Most companies are stuck in a zone where they get 80 percent of their sales from 20 percent of their customers. They will do almost anything to avoid losing customers that are responsible for 80% of their revenue. This dilemma is even harder for small firms. Large companies have the option to acquire bolt ons to diversify."
William KrautWilliam Kraut is an accomplished, Board-savvy advisor on strategic and financial issues to firms ranging from start-ups to mature private and public companies. Bill had a distinguished 30 year career with Amper, Politziner & Mattia LLP (now EisnerAmper, LLP), one of the largest New York area CPA firms.
"It requires significant effort to get new customers (even competitors of current customers). It is important to cater to customers’ needs without getting "controlled" by them. This requires a difficult balancing act."
Lynn LednickyLynn has had a diverse career as an executive and advisor. As President and Founder of Lednicky Enterprises, he has provided expert advice to the energy, utility, and infrastructure sectors. His engagements have included M&A support, operational and financial restructuring, renewable energy, project development and financing and advising on production and use of natural gas as a domestic transportation fuel.
"Planning is the key. Successful businesses must imagine their possible future and at the same time know the capital resources necessary for that future. If the left foot is aspiration and the right foot is planning, it is easy to see that progress is impossible unless both feet are moving forward in a coordinated fashion. To diversify your customer base, planning leads to awareness and awareness leads to an action plan."
Kevin McGonigleKevin's professional experience has focused on helping mid-market and large corporate clients to address their most critical business issues. He is a seasoned executive and advisor who helps C-suite executives tackle key strategic, operational, financial, and human capital challenges.
"Companies must be very intentional in who (and how) they approach with their sales pitch. It becomes too easy to go after customers that look just like its existing customers. Doing this only compounds the problem as the business becomes increasingly concentrated in a given sector. Better-run companies tend to devote considerable time to understanding exactly what their value proposition can be for an array of prospective customers and then having their most talented sales folks focus on penetrating each prospect’s niche. Getting comfortable in selling to just a few companies or in a given industry vertical might feel good in the short term, but tends to come back to haunt businesses in the longer-term."
Art MediciArt Medici has a diverse background as an executive leader in e-commerce, high tech, telecom and information companies. His experience spans startups, high growth small/mid cap firms and global leaders like Thomson Reuters.
"Where possible, a product line extension or enhancement that targets a new segment is a great approach - especially if it is differentiated from competitors. Providing extra incentives to sales people for each new customer brought in can be an effective approach."
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Billie OttoBillie was until recently Executive VP and CIO of TrueBlue Inc. (NYSE: TBI) the largest industrial staffing firm in the U.S. The company has nearly $2 billion in revenue, serves approximately 130,000 customers and deploys more than 375,000 temporary associates.
"Larger companies with deep sales cultures and a long history of how things are done typically can often buy their way to diversifying their sales base if they are adept at M&A. Smaller companies usually attract new customers by incubating a new idea into a new offering. To grow that new offering they may need to scale back the resources they devote to an existing customer. I've also seen success in this when a company poaches an innovative sales person from a competitor or adjacent industry and commits to enabling a new path/product or approach to the market."
Ted ParrishTed Parrish has a strong background as both an operating executive and an advisor. He brings to Newport extensive background in financial services strategy and operations.
"Mid market companies tend to diversify the customer base by diversifying the product/service base. Of course, this creates a new set of problems with managing offerings which may not be in the company's areas of management skill or expertise."
Kevin PooleKevin Poole is a seasoned leader with diverse experience as both a senior advisor to CXOs of middle-market firms, and as an operating executive at a Fortune 500 company.
"In most instances I advise my clients to pursue an industry-focused approach to diversifying their client base. By focusing their sales efforts on a narrow range of industries, companies can shorten their sales cycles and increase their win rate. They do this by leveraging key knowledge acquired by working with existing clients in their selected industries—but without disclosing any proprietary information."
Mark RosenmanMark is a co-founder of Newport Board Group and its Chief Knowledge Officer. Serving as the Chief Knowledge Officer at Tatum, he successfully drove strategies to develop, capture, share and deploy the knowledge and experience of the firm's professionals.
"Undue customer concentration is often fatal to attracting capital or a transaction partner. It is easy to quickly lose one or more of your best customers—because they merge or are acquired; change their business model or geographical location; or switch to another supplier that “buys” the business by pricing below its cost or gives “goodies” to buyers. Mitigating this risk requires management focus. Diversifying requires beating the bushes for customers that aren't competitive with your best ones--even if you have to tweak your products/services to sell to them."
Mike SannaAs a senior executive in the technology and semiconductor industries, Mike has significant accomplishments in marketing, engineering, operations and general management. He has a strong track record in such key areas as developing and executing rolling multiyear market and product strategies and leading intercompany development teams to create unique solutions.
"The key is to have a good strategic plan. That allows a company to focus on today’s needs while planning for the future. For instance, if a company targets and successfully sells into the Apple iPhone supply chain, its business might grow by 5-10X very quickly. They need to focus very heavily on executing and continuing to meet the needs of Apple for the short and intermediate term. At the same time, at the strategic level, they need to assess the short term to long term risk of being so heavily dependent on one customer. That assessment must identify when they must close other business to offset the potential loss of revenue and profit from Apple. Their plan can target other customers in the same phone space, parallel markets that are in their wheelhouse such as virtual reality, or acquiring businesses in their generic market space with a different customer/industry base. Or as a last resort they can expand into a different business altogether. This is a long term strategic decision. An established process is required to evaluate and execute it."
John SullivanJohn has delivered top- and bottom-line results running a wide range of companies and dealing with challenges like acquisitions, lean manufacturing, supply chain optimization/low cost sourcing, new product development and brand and channel management.
"Enthusiastic customer testimonials are the bestselling tools. Successful companies find a way to leverage the success they are having with current customers to win new business. This often requires adding a sales or marketing resource, typically a fixed cost that represents a leap of faith for many companies."
Eran TagorEran has diverse experience in executive management, venture capital, private equity and M&A, including turnaround, restructuring and special situation transactions.
"Companies looking to diversify should create different pricing/service level/product offerings, so they have a few large, anchor customers, and a larger pool of many smaller, less critical customers. Customer diversification should also be reflected in management’s goals. A typical approach is to try to get a few large contracts for the year and a larger number of smaller ones. The goal is to create a stable base of customers that will help you cover your costs and then another group to boost incremental growth and make you profitable."
How do you plan on reducing your customer concentration? Share your thoughts with us below, and don't forget to download our free guide "Business Growth Challenges Defined: You May Be In No Man's Land."
