What is Customer Concentration?
Customer Concentration is the percentage of your revenue that comes from a single client.Alternate names: Customer Revenue Concentration
How to calculate Customer Concentration
What is a good Customer Concentration benchmark?
For businesses that have a high volume and low deal value customer base, with mainly SMB companies as customers, the holy grail is no single customer making more than 1% of revenue. Whereas, for businesses with enterprise-type customers and generally a low volume and high deal value customer base, the target is to stay under a 10% revenue concentration.
Your business generates $3 M revenue in one year, and $1 M of that is generated by a single customer. This means that your Customer Concentration is 33% and you should consider measures to mitigate this risk.
More about this metric
Customer Concentration, or Customer Revenue Concentration, refers to the amount of your total revenue that is generated by either your highest paying client, or a set of your top paying clients. There is risk associated with this number being too high because of the potential impact of losing high paying customers. On the other hand, there is a school of thought that high customer concentration has certain advantages such as forging long-term relationships with customers and the ability to focus time and resources on these customers. However, it is generally agreed that high Customer Concentration can lead to complications including difficult customer demands and sudden loss of revenue.
The rule of thumb, especially for more mature businesses, is that no more than 10% of your revenue should be coming from one customer. Similarly, no more than 25% of your total revenue should be dependent on your top 5 customers. Ways to mitigate this risk could be to implement rigid policies that discourage clients from changing the standard procedures of your business, diversifying your client base, and widening the scope of your target market. Additionally, it is normal for early stage startups to have higher revenue concentration, likely due to the lower number of clients. For businesses serving SMB companies and having a high volume customer base with low deal value, the ideal is that no single customer should make more than 1% of your total revenue.
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