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Are you dependent on a few big customers?
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Bikky Khosla | 26 Dec, 2012
Winning a big customer is an exhilarating experience for every small business. It's just like hitting a treasure trove . . . this could provide your small business with the much-needed revenues and push your firm's reputation up significantly to persuade many new customers to join your customer base. Obviously, such a relationship carries weight, but sometimes the eagerness to 'win big' may lead to overlooking the potential damage from over-reliance of your business on one or a few big customers.
Customer concentration can be a very serious issue for a small business, because first, a small business, if it relies on a few big customers for revenues, can easily be brought to its knees when one or two of these customers suddenly pull an order. Every business is hurt when it loses a customer, but if you are a small business and a significant portion of your total sales is concentrated in the customer, the consequences could be catastrophic.
In addition, when you depend on a few big customers, your business strategy is most likely to be dictated by the needs and preferences of these customers, resulting in your failure to see the big picture of the market. Also, the big boys may try to force their whims on you when it come to payment terms, duration and prices. Neither is it wise to think that big companies are not exposed to risks. Market conditions can affect any business, both small and big.
To prevent your business falling into the trap of customer concentration, you need to understand your customer base thoroughly. Here I think ranking each of your customers by its margin contribution, growth potential and strategic fit could help a lot. Asking yourself how each of your customers is contributing to your business profitability (rather than revenue), how much growth potential each of them has, and how important you are to your clients: are you really needed by them or merely a 'nice to have' - all these things can give some valuable insights.
Besides considering individual clients, it is also important to think of concentration by industry. If majority of your revenues are coming from customers from the same industry, your small business would be susceptible to downturns in that sector. So, it is equally important, in addition to spreading your revenues across both vertical markets and geographical areas, to be alert to opportunities that exist in other industries.
I think every small business should take into account the risk of customer concentration in its business planning and operating process, and develop a contingency plan. Analysis of customer dependency should be done at a regular interval, and whenever the findings indicate to something like 10% of total revenues coming from one customer, or 25% from the top five customers, or 60% from customers from a single industry, this should be taken as warning bell.
Best wishes for a splendid New Year. Our weekly newsletter returns on January 2.
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BIG companies are essential for SMEs
Bhagawath Prasad | Sun Jun 24 09:17:05 2018
Response to article,made my smile, it's common problem since ages for SMEs, BK sir has just pinched suffocating baby and it cried loud.in my opinion BIG companies are essential for SMEs as they are the only one who can give volumes,but the issue with them is,they corners SMEs and ensure that they don't make any profits,they treat each of their internal department as a profit centres within it's own company balance sheet,managements forces them with profit targets,please note profit , not work targets,thereby,their officers would ensure that SMEs and traders must loose money with them,if incase they have no option but for giving little profit,they would ensure that it's taken back in form of interest by adopting to delayed payment methods,delayed payments reduces their working capital requirements,if not this they have many other violent methods as well. So it's just next to impossible for SME to make money with biggies,one need divine interference to earn from them,frankly,no government can help here.Therefore my suggestion to all SMEs:Tactfully keep as many BIG companies as possible and serve them as least preferred vendor,means you are there for them at their difficult situations,Treat that loss as advertising expenses in your books,Loss of supplying to biggies helps to gain many small customers,it helps to get loans from banks,helps build brand name,helps to know processes,alerts changing environment,but keep in mind that you must not exceed 25% of your capacity.GOOD LUCK
Costumer
Ajit Kumar | Sun Jun 24 07:59:43 2018
A business man depending upon a customer. Is it right or wrong? Please reply
Big Customers
Fabusuyi Gbolade | Tue Jan 15 14:41:48 2013
I must admit that the write up was quite beneficial to me. But the question then was how realistic could this biz strategy be to a struggling entrepreneur with a lean capital base. This is the major with many small businesses in Africa, Nigeria is not an exception. With little or no govt support, the small biz man has got no choice.
Trade between India Singapore
Davinder Singh | Tue Jan 8 16:09:41 2013
Singapore is best country for trade because it manufactures every thing of good quality.
% of Big Customer dependency
Vinay, India | Mon Jan 7 05:37:11 2013
Though the article was very good, I would like to highlight some few points. The important point to be considered is the production capacity of the company. If we take 35-40% orders from small customers, the delivery commitment for big customers will be definitely effected. Big customers will pull out their orders and henceforth the dependency on small customers cannot give the expected revenues. So, my suggestion would be there should be a balance maintained depending on the productivity of the company. Cheers, All the very best in the New Year.
Big Customer dependecy
Roger Junnarkar | Thu Jan 3 13:55:58 2013
Great article.
Its always good to have big customers in your business but the bottom line is how much money did we make at the end of the year.
Big customers means low gross margin and flexible payment terms but they do give us the buying power.
I would concentrate on 45% small customers who pay you the top dollar and the profit margin is the highest and are very loyal,35% Mid size customers and rest should be Big customers.
Eye opener
Arun Jain | Wed Jan 2 11:45:08 2013
An excellent message has been given in your article. Since 1990 I was manufacturing for a big group. The factory used to run 100% with good margins. We had to put all efforts and exhaust all the resources to achieve this target but all of a sudden the orders vanished and we were put into the dark finding no escape. This way I worked for 10 years earned a lot but could not save anything. Finally the business was discontinued for no market standing. One more point I would like to emphasize that don't keep all the eggs in one bucket. Later on I started trading activity got associated with a very big company. The business grew fast and due to high demand and good margins rest of the buyers remained unserved. Gradually my entire capital was trapped in one big group who started playing with me unethically and put me in a suicidal stage.
Your article will be helpful in opening the eyes of many more persons like me.
THANKS
SMEs shoud have own counters in the market
Kailash | Sat Dec 29 12:06:56 2012
One (wholesale trader, MSME, SME) must have one's own (not rented) counter in the wholesale market in b2b market as now a days even a very small retailer tries to import goods himself or buy from the manufacturing units directly. Competition is so tough that one must have direct contact with end users (which is no doubt quite irritating and time consuming). For very small amount supplier has to make many rounds. So volume one gets from big buyers and also grows faster.
High dependency
Hareesh.MP | Fri Dec 28 05:33:43 2012
The points mentioned in the article is of utmost importance; that too in a situation where entire economy is going through a cash crunch & volume de-growth. As I am running an SME, I really appreciate these 2 points ie, Depending Big counters for Volume & Cash. Both are deadly dangerous. They can force us even to borrow working capital expecting future demand. But both are not going to happen in the near future. So the ideal way is to manage your Cash flow,look at only Margins;not turn overs.If possible try to do a backward or forward integration or go for a diversification, which in turn can give you a steady cash flow,even though margins are lesser.Any model which can't assure a steady cash flow or reasonable margins are not sustainable in the long run.
Good to see relevant articles like these in tough times.
Very true
Anil K Garg | Fri Dec 28 04:52:37 2012
That's very true, I have experienced this because I am dealing with ultra HNI and corporates for investment advisory
SMEs lack required skills
Antony Joseph, Principal Consultant, NEWAY Consulting | Fri Dec 28 02:11:10 2012
Client concentration is an issue even in the IT sector where the business volumes are in billions. Your post is very timely. However, most small businesses lack the time, energy and analytical skills not to enter this trap/ to find the way out if they have. They may also require professional help here, but they may be averse to taking the problem to professionals who can think objectively and advise them and instead try to do this on their own.Therefore, only a more enlightened approach and good planning will help small companies/businesses to grow in a more profitable manner. All the best!
Thanks
Asodia Deepak J. | Thu Dec 27 09:50:41 2012
Thank you very much for your tips.We will be thankful to you if it continue in future also.Thanks a lot.
Trying for last 10 years -- unsuccessfully
Rahul | Thu Dec 27 08:44:49 2012
Its easier said than done.
Everybody knows it but do we really have a way out.
Yes there is a way out but can we achieve it. I have been personally trying to get out of this for last 10 years unsuccessfully.
We have grown about 40% every year but still face this Enigma.(either we stop accepting new stuff from existing big customers ) is it GOOD ____NO. Frankly the big are becoming bigger.
Are you dependent on a few big customers?
P. SUBRAMANIAM | Thu Dec 27 08:40:10 2012
GOOD AND WORTHFUL MATERIAL TO READS AND FOLLOWUP.
They ignored, they are suffering
Milan Mehta | Thu Dec 27 07:28:53 2012
Bikky, you have hit the nail right on the head ! I know 2 brothers, who were in manufacturers of zippers and had only few large customers. Today one is doing job in Garment factory and other is working as manager in his client's shop !! No diversification of business, no addition of new clients, no geographical spread and doomsday was near I advised them ... however they did not heed to my advice and as you rightly said, business closed one day.
I'm a sufferer
Opeduru John FCCA, CPA(U), BA | Thu Dec 27 07:26:54 2012
It is like as if this article was written about my small audit firm business here in Kampala Uganda.This year I lost one big client that was contributing over 30% of my annual turnover and I am starting the new year on my knees. I have been telling myself that I need to get new clients if I am to survive but the challenge in my type of business is that my services are demand-driven and it is not easy to get clients unless they actually need your services. The client that I lost this year was forced by the bank where they had borrowed money to engage one of the big 4 international audit firms as their external auditors, because according to the local branch of that bank here in Kampala, that is the policy from the HQ of the bank based in London. Otherwise my client still wanted me and the local bank who had been getting copies of my audited accounts said they had no problem with my audited accounts since they complied with International Accounting Standards. Thank you for this article.
Regards,
Cost me dearly
V PRAVEEN RAJ | Thu Dec 27 06:39:26 2012
My own experience of having to depend on one big customer did cost me dearly. I actually did not lose any business, but the way they entered into my domain to dictate things cost me on my bottom lines. I still thank my 'big' customer for one thing, they helped me stand on my feet and as a gratitude contributed to them a lot. A time comes when you decide your own course, with immense experience I developed my own brand. Now, with multiple customers I am doing much better than before. A big customer and big orders do teach a valuable lesson and one should not shy away from taking risk. The learning and experience is far more valuable. Never put all the resources for your customer, keep aside some for your own venture that comes handy at a right time. I made a terrible mistake by over using resources just to serve my big customer and lost precious opportunities on the way. As they say, better late than never, I branched out at a right time. My big customer has now walked into my competitor who is now "very busy" with the orders and giving me enough room for "other" customers. Competition do pays at times.
VERY GOOD ARTICLE -
UMESH MYSORE SHIVARAJU | Thu Dec 27 05:20:36 2012
Very meaningful article & its warming for all businesses. The last 2 sentences make BIG BIG sense. Thanks a lot. Reviewing businesses on these lines is very helpful, say, for each quarter.
I appreciate.
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