What percentage of your total business comes from your biggest client? How about your top 5 clients? I continue to be surprised by businesses that have a huge portion of their sales from a small number of customers.
So what, the owner says. They’ve been doing business with us for years. They know others won’t be as responsive, won’t match our low prices and high level of service, don’t have our expertise in their industry, etc. Well, in that case, I’d have to agree. The likelihood of changing vendors is remote- you’re perfect for them! But there’s something else you’re not considering: what if their sales slow and they don’t need as much of your product? Having a perfect vendor doesn’t matter if they don’t have customers.
Far East manufacturers who supply Wal-Mart are facing this situation. “A softer US economy, higher gasoline prices and miscues have left the world’s largest retailer with a growing amount of unsold inventory in its stores, including about $2 billion in clothes and home décor products.” Several manufacturers said they could not survive without their flow of business from Wal-Mart.
So what to do? First, analyze your own sales and figure out how concentrated it is among your top clients. Second, consider ways to diversify, including more focus on your second tier clients- the next level down from your biggest clients. Since they already buy from you, they are great prospects for increasing your sales. Third, run some financial “what-ifs” to determine how your company would look if you lost a large client.
The Lesson: Don’t wait for the storm clouds to move in before protecting yourself. Plan for the loss of a large client buy diversifying your business and analyzing your financials.
Your Homework: Consider what dollar amount of your costs could be eliminated if you lost a large portion of revenue. Which costs are fixed, which are variable?
(Source: “Wal-Mart Sneezes, China Catches Cold”, Wall Street Journal, 5-29-07)
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