Every Monday we publish education on key business metrics you can use to operate and scale your company. This week we cover Customer Concentration.
CUSTOMER CONCENTRATION
Customer concentration is an indication of the diversity of your company’s revenue and concentration of risk. The goal with any business is to create diversified revenue streams with little concentration. If more than 50% of your revenue comes from one or two customers, the sudden loss of one or both could be detrimental. Therefore, aim to have as low of a customer concentration as possible.
Calculating Customer Concentration:
Divide the amount of revenue for each customer and divide by total revenue for the same period.
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- Total Revenue: $150,000
- Customer A: $50,000 ($50,000 / $150,000 = 33%)
- Customer B: $30,000 ($30,000 / $150,000 = 20%)
- Customer C: $10,000 ($10,000 / $150,000 = 7%)
- Customer D: $4,000 ($4,000 / $150,000 = 3%)
- Customer E: $3,500 ($3,500 / $150,000 = 2%)
- Concentration of Top 3 Customers: ($90,000 / $150,000) = 60%
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In this example, the top customer accounts for about one-third of all revenue, while 60% of all revenue is attributed to the top three customers. The customer concentration for this business is borderline high.
REDUCING CUSTOMER CONCENTRATION
If your business’ customer concentration is too high, there are a few steps you can take to diversify your revenue stream.
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- Increase marketing effort and investment to recruit new customers
- Grow and cross-sell to your existing smaller customers
- Lock up top customers into long-term contracts to make revenue more predictable and secure
THE BOTTOM LINE
It is difficult to improve what you do not measure. Thus, the first step in any business strategy is to determine the important metrics to achieve your goals and measure them. Regularly monitoring your customer concentration will ensure you address existing risk and increase the enterprise value of your company.
If you would like to learn more about other key metrics to help in your decision making or could use a partner to help build a custom KPI Dashboard for your organization, contact us for a free strategy call.investment