There is so much to consider when starting or maintaining a business. As a business owner, you are always thinking of your customer's needs, yet you might not have considered your customer concentration. This information can help you keep track of where most of your revenue comes from, which means more control over the success of your business.
Knowing your customer concentration gives you more control over your customer concentration and the success of your business.
Customer Concentration Defined
So what is Customer Concentration? Customer or client concentration is how concentrated your revenue is across your client base. If more than 10% of your revenue comes from a single client or 25% comes from a group of five of your most prominent clients, you may have a high customer concentration.
Having a high customer concentration can be a risky position, so how do you find out if you need to take action?
How to Measure Customer Concentration
To measure your customer concentration:
- Looking into your financial records, identify the customer who generated the most revenue for your business over the last year.
- Next, calculate how much revenue that client generated for your business that year.
- Divide that amount by the total revenue your business earned that year.
- Multiply that number by 100. The resulting number will be the percentage of your customer concentration.
What Are the Risks Associated with High Customer Concentration?
Knowing your business’ customer concentration is critical because of several potential risks.
A high customer concentration puts your revenue and business in jeopardy. If you were to lose that client, you lose most, if not all, of that revenue. If you suddenly lose that revenue, you may be unable to recover.
Suppose the customer you rely on realizes how important they are to your business. In that case, they may use it to their advantage by demanding lower prices or additional services without additional payment. They may also request other preferential treatments that might not be in your business’s best interests. However, with a high reliance on that client, you may find yourself in a tough spot to refuse.
What is the Optimal Customer Concentration?
You don’t want more than 10% of your revenue to come from a single client or more than 25% from a group of your five biggest clients.
Even though there can be an opportunity for mutually beneficial relationships between your business and a large client that keeps it afloat, in general, the lower you can get your customer concentration percentage, the better.
Customer concentration also comes into play when looking for a loan or attempting to sell your business. If the bulk of your revenue comes from one client, this is often seen as too volatile for a bank, investor, or buyer to risk.
Even if you can secure a loan, investment, or sale, it won’t be at your most beneficial terms.
Tips to Reduce High Customer Concentration
Reducing a high customer concentration strengthens the health of your business. It follows that more customers mean more substantial growth and increased revenue. Here are some simple ways to grow your customer base, thus lowering your customer concentration.
Invest Time in Social Media
While a website can also do this, on social media, once a potential customer follows you, all the content you post comes right to them. It creates brand recognizability and comfort. They become familiar with who you are and what you do.
Engagement is also vital when it comes to social media. Research and find the best platforms for you, your business, and the customers you are trying to reach. Be realistic about how much time you have to build and maintain your social media platform.
Social media lets you show off customer service and care skills by positively replying to customer reviews, concerns, and questions in a public forum.
Before launching your social media presence, ensure you have a clear voice, strategy, and realistic expectations.
Creating video content on YouTube can help customers find you, see your product in action, or experience the expertise you bring to your services.
Use SEO to Increase Your Digital Reach
SEO or Search Engine Optimization can be a “make it or break it” situation for businesses with a web presence.
If you have a website that no one can find, do you even have a website?
Essentially, you want to ensure customers and potential clients can find you in a search engine search. Like anything else, there are tips, tricks, and strategies to ensure you come up as high as possible in a Google search, which can make all the difference in standing out from your competitors.
Invest your time researching and employing SEO strategies or services to appear in more search engine results.
If your business sells a mainly niche product or service, it can be difficult to appeal to a large customer base. Can you modify your product or service to have a broader appeal?
Sometimes a product or service intended for one audience fits the needs of several. Is there a use or audience for your product that you haven’t thought of? What would marketing to that audience look like?
Strengthen Your Network
Build relationships with other companies. Are there companies that provide a complimentary product or service to yours? For instance, an online yoga school could partner with the maker of yoga mats, so their clients can easily find each other since they will most likely need each other.
If you don’t know any companies you can partner with, brainstorm. What other services or products might your clients need that you don’t provide?
Another way to build networks is through attending networking conferences, local business conferences and showcases, and other professional development opportunities and showcases for products and services in your field.
Customer Concentration Awareness
It is vital to manage the risks of high customer concentration. When you know your customer concentration, you know how important a single customer or group of large clients is to your business. Your dependence on them also defines how beholden you are to their requirements and needs. work to ensure the strength of your business and the longevity of your revenue.
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