Everyone who has ever run a business understands the concept of having a customer who’s more important than the rest. But a very large customer may not always be the best thing for your company.
Often we find that a business owner/manager hasn’t performed adequate analysis to see if their biggest customer is really producing the outcomes they desire. They may look at the top line and see that their largest client is responsible for a huge chunk of total revenue. What they don’t realize is that single customer may be eating up a disproportionate share of resources and thus not having the impact on the bottom line as assumed.
It’s also not healthy when a firm has a customer so big that they are economically dependent on them. When this happens, we even see the customer starting to dictate policies, procedures and prices. They monopolize resources and hinder the ability of a company to grow and evolve. Soon your business becomes a mere extension of their business.
The corporate world is littered with people who built a great company, but depended on a single client for 60 or 70 percent of their revenues. When that went away … the firm floundered.
Leaders should strive to have a customer base that is large and diverse enough that the sudden loss of any single customer would not threaten their continued viability as a going concern. Always preserve your independence to the point you have the freedom to “fire” your biggest customer if the relationship is no longer mutually beneficial.
It’s easy to become bedazzled by a big client. You enjoy the prestige of partnering with a high-profile company, and the numbers on your gross revenue spreadsheets are eye-popping.
But when is the last time you performed a gross profit analysis, looking at not only sources of revenue, but how much you are spending to serve them? Explore beyond the topline numbers to reveal the true cost of having them as a customer. Are there other initiatives you’ve been wanting to explore, but your team is so monopolized there isn’t time pursue them?
There’s nothing wrong with having a big client who generates profits for your business. But a prudent business leader will look at the longer term, and manage clients so as best to perpetuate the sustainability of your own organization, including your overarching mission and the welfare of your employees.
You want every relationship between your company and its customers to be win-win for both parties.
The example of one of our clients best illustrates this point. During the Great Recession, they lost a major customer and as a result a big portion of their revenue. But they were surprised to find that their profitability actually increased! That’s because they had lost sight of how much it was costing the business to serve that one client. By being forced to explore other opportunities, they were able to make up the difference – and more.
This is why it’s prudent to run an analysis from time to time on your customers. Take a look at not just the benefits, but also the risks of having a large customer.
If the overall profitability of a customer is not commensurate with the level of services they are demanding, or if you find yourself unable to adequately meet other customers’ needs, or if you find yourself economically dependent on the leadership of another company, you might want to consider severing or altering that relationship.
It’s better to fire your biggest customer than become beholden to them, which may stifle your own ability to grow. Because when that happens, for all intents and purposes, they own your company as well as their own.
They may squeeze your profit margins so they become razor thin, and/or demand additional services that further squeeze your profitability. You find yourself in a vicious cycle of trading dollars, but not realizing an adequate rate of return on your investment.
In every healthy business relationship, it must be mutually beneficial for both parties. Just make sure your well-intended desire to hang on to that big customer does not get in the way of other growth objectives of your business!
Tom Sponsel is managing partner of Sponsel CPA Group.