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Edition 258 – Exposed

I learned very early in my career just how detrimental to a business’ livelihood it was to have a reliance on a large client. I’d started a new job in North Sydney with a small accounting firm, lured by the promise of new and exciting work – and a reasonable pay rise.  The City based firm I’d been with were already paying me well and throwing me interesting work. Perhaps I was greedy – the offer of more was on the table and I jumped at it.

There were five people in the organisation and less than six months into my new role, they binned two of us. The largest client, which represented about 40% of the client base, made an offer to one of the two owners of the business to join the executive team. Being a car person, I distinctly recall that a 5 series BMW was waved in front of my boss. No doubt that hastened his decision making process.

In my opinion, no business should have any more than 20% of its revenue coming from a single customer for the following reasons:

  1. Your business is exposed completely to their business. If they go down, so do you – through no fault of your own.
  2. You build your business model around their business model – which doesn’t achieve your personal, financial, business and family objectives.
  3. You are reacting to the demands of the client – not innovating your own product or service.
  4. It creates a massive financial risk, be it if they were to fall over or even if they were a slow payer.
  5. It distorts the profitability of your business, either in a positive sense (it’s a really profitable client) or in a negative sense (it doesn’t make money for you – it merely generates revenue).
  6. It makes you think you’re bigger than you really are.
  7. The business and the owners can become lazy by virtue of the belief the big client will always be there.
  8. Your attitude and mindset is to jump to attention when the large clients demands it – even when those demands are completely unreasonable.

Sometimes, a small client becomes a larger client merely by the fact that you’re doing a good job and they choose to refer more work to you. On other occasions, it is as a result of the fact that you win a large contract and overnight, your business changes from a minnow to a whale. Irrespective of the reason for the growth, here’s some things to think through how you can handle a significant client in your client base.

  1. Get bigger to the point that your client represents no more than 20% of your business.
  2. Monitor the profitability of all your clients, not merely the revenues. I’ve seen a business where dumping a client that generated 25% of revenues turned the business from a loss to a profit. True story.
  3. Don’t make big purchase or hiring decisions based on a single client’s business decisions.
  4. Be prepared to walk away from a deal if it takes your business too far out of your strategic position.
  5. Remember, the larger the client, the more likely their outlook is corporate and thus based on numbers, not on a relationship.
  6. Be in front of them, a lot! If they have any plans, you want to know about them before any big announcement is made. That means investing in the relationship, having multiple contacts and gaining as much intelligence as possible about future plans.

The ideal size of your largest client is actually 10%. That way, they don’t dominate your business, it’s easier to measure their profit contribution and, if they move on, it won’t scuttle your business.