All businesses are hurt when they lose customers, but a small business with a significant portion of its total sales concentrated in just a few customers can be especially hard hit. And having just a few main customers can be quite common for a small business, such as those that sell to wholesalers or distributors. The risk of losing a major customer – sometimes referred to as customer or revenue concentration risk – can be difficult to avoid or mitigate. But this risk must be taken into account in planning and operating the business and in developing a contingency plan.
The major customers of your small business may be strong companies, with a long and stable history. But all companies are exposed to economic downturns that can cause consumer demand to decline. They are also exposed to competition, shifting market conditions, new developments in the market that can affect their sales, and internal difficulties. Any reduction in demand or other economic or financial problems that your customers face will directly affect your small business. In the worst case, the loss of a major customer could put the sustainability of your small business in jeopardy.
There are ways to manage the risk of customer concentration, without affecting your current good relationship with your customers. Some of these involve how you operate your business and your relationship with your customers. Others are more of a contingency planning nature that can provide you with some assurance that you will be able to continue your business even if you lose a major customer.
If you sell to your customers on credit terms, you need to continuously monitor and update the information you have on your customers’ financial status. Maintaining an open line of communication with your customers can provide you with some advance notice in the event of any problems. Depending on your relationship with the customer, they may tell you about the difficulties they are facing. You may also see some telltale signs, such as smaller or less frequent orders, or delays in payments. Depending on your own condition, you may be able to maintain a customer by offering extended terms or price concessions.
If you lose a major customer and need to find another, you need to do a credit evaluation before offering credit to a new customer. You could ask the potential customer for financial information and credit references. You could use your network of contacts in your line of business to find out more about the potential customer. Or you may be able to obtain credit reports through companies such as Dun & Bradstreet or Hoover’s.
When there is a limited number of customers and a wide base of suppliers, you face a greater degree of competition. As a small business, it may be more difficult for you to compete based on price, but you can offer the customer other advantages. You may be more conveniently located, you may accept credit, and you may be able to provide a more personalized service, tailored to the customer’s needs.
As Tom Addyman indicates in Business 24/7, you should make sure you maintain the qualities that brought you the customer in the first place. What is it that the customer likes about your product and your business? Do you risk losing a major customer because any of those qualities have changed, or is the risk related to overall economic conditions? Keep track of what competitors are offering, and if you are losing an advantage you may need to create a new incentive for the customer to buy from you.
You may need to get honest and open feedback from your customers in order to determine where you could do better in terms of your product, price, payment terms, delivery and service. This will not only help you improve your business and attract new customers. It can also help you strengthen existing relationships with a customer and potentially avoid losing them. And when the feedback is positive you may be able to use it as a testimonial to attract new customers. Your existing customers may even be able to refer you.
When you run the risk of losing a major customer, or you actually do lose one, you need to broaden your customer base, diversify your products, or both. Jess Lash, in “How to Be a Good Product Manager”, quotes Robert Cooper, author of the book “Product Leadership: Creating and Launching Superior New Products”. Cooper points out that in order to be superior, a product must have real value for the customer, and this superiority must be defined in the customer’s eyes. The product must be of better quality and must meet the customer’s needs better than competitive products. The product may be novel or innovative, may have unique features, may solve the customer’s problems better than other products, or may reduce the customer’s overall cost.
The SCORE organization, “Counselors to America’s Small Business”, in “Small Business Basics”, points out the importance of the “four P’s” of the marketing mix: product/service, price, place and promotion. You need to offer a quality product or service at a reasonable price. You need to be in a convenient and attractive place for your customers, which could be either a physical location or a website. And your potential customers need to know about you. This means that you must promote your business through advertising. SCORE adds a fifth P – positioning. You need to set yourself apart from your competition and establish your position in the market. This can be done through a unique combination of all the other P’s.
Developing more than one market niche can also mitigate the risk of losing a major customer. As explained by Ann Meyer, in an article for the Chicago Tribune, two markets are better than one when the economy is in a downturn. While it may be difficult during tough economic times, innovation and market diversification may be the key to long-term success. Looking for new markets early and continuously can protect your business from downturns and can open up opportunities. You may find niches for a modified or enhanced version of your existing product or services. Or you may be able to sell your product in a different way. If you lose a wholesale customer or distributor, you may be able to position your product differently in the market and sell directly to consumers. The key is to be sensitive to changes in the market and adapt your marketing mix to fit the current circumstances.
Ann Meyer, “More than one niche helps keep firms from falling through the cracks” – The Chicago Tribune
Chavon Sutton and Brett Nelson, “The Biggest Risks To Your Business” – Forbes
Get Credit Reports – Dun & Bradstreet
Jeff Lash, “Differentiate to avoid being a “me too”” – How to Be a Good Product Manager
Products & Services – Hoover’s
Sony Electronics, Inc., “Small Business Basics” -SCORE
Stephen Davies, “Mitigating the Downside” – The New York Enterprise Report
Tom Addyman, “Balance of power in a supply chain” – Business 24/7