Welcome to our deep dive into one of the most significant risks small businesses face: over-reliance on a single client.
As comforting as it may be to have a major client who consistently brings in substantial revenue, it puts your business on precarious footing. Let’s explore strategies to diversify your client base and stabilise your future revenues.
Understanding the Risks
Picture your business as a table, ideally supported by multiple legs, where each leg represents a different client. Now imagine what happens if one leg (a major client) is much larger than the others, or worse yet, if it’s the only leg.
If that leg were to give way, your entire table – your business – would be at risk.
Key Risks Include:
- Income Gap: The departure of a major client can create a significant revenue gap that might be hard to fill.
- Limited Bargaining Power: Heavy reliance on one client often means their leverage over you concerning pricing and payment terms increases.
- Financial Instability: Any delay in payments or changes in contract conditions can lead to financial turmoil.
At Vibrant Accountancy, we once worked with a business that relied on one client for 60% of its revenue. When that client unexpectedly downsized, the business faced significant survival challenges.
This experience highlights just how crucial it is to anticipate and prepare for such risks.
How to Broaden Your Client Base
One of the best ways to reduce the risks that come with relying on one or two clients is simple: get more clients! A broader client base means more stability and less stress if one moves on. Below are some practical ways to make that happen.
We recommend you structure your business so that no single client contributes more than 20% to your total revenue.
- Diversify Your Marketing Channels
Don’t put all your energy into one platform. Mix things up with social media, email marketing, SEO, and even offline methods like networking events. The more places you show up, the more opportunities you create to attract new clients. - Explore New Industries or Niches
Look beyond your usual market. Are there sectors that could benefit from what you offer but haven’t tapped into yet? Expanding into new niches can open doors to fresh revenue streams and reduce dependency on your current client base. - Offer Complementary Services
Think about what else your clients might need. Adding related services can make your business more appealing and help you attract a wider audience. For example, if you provide accounting, could you also offer business advisory or training? - Network Strategically
Building relationships is key. Attend industry events, join online communities, and connect with potential partners. Strategic networking can lead to referrals, collaborations, and new client opportunities you might not find through traditional marketing.
Implementing a Subscription Model
Another smart way to reduce risk is to turn what you already do well into recurring revenue.
Take the previous example of a business that depended heavily on one large client. To reduce this risk, they started a subscription model.
Within a year, this strategy created many smaller, consistent revenue streams, lessening their dependence on the single large client and increasing their financial stability.
This approach isn’t just about customers. Over-reliance can happen with suppliers, key team members, or even one marketing channel. A subscription model supports a more balanced structure, echoing John Warrillow’s “Switzerland Structure” principle: build independence across all areas of your business so no single relationship can destabilise you.
Other Strategies to Safeguard Against Client Concentration Risk
Aside from growing your client base, there are a few other ways you can make your business less vulnerable against the risks of client concentration. Try these tips:
1. Strengthen Contracts:
Implement robust contracts with safeguards such as notice periods (e.g., three months), providing a buffer to adjust your strategy.
2. Regular Risk Assessments:
Continuously evaluate the risks associated with major clients. Consider the potential impacts on your cash flow and overall business health if a significant client departs.
3. Emergency Fund:
Build financial reserves. An emergency fund is critical if you depend on a few large clients. This fund acts as a financial buffer to support operations during unexpected downturns.
4. Client Communication:
Maintain open lines of communication and regular feedback with all clients. Early detection of potential shifts or dissatisfaction can give you a competitive edge in mitigating risks.
5. Rapid Response Planning:
Have a contingency plan in place. If a large client leaves, assess your financial landscape immediately, identify cost-saving measures rapidly, and possibly make hard decisions to protect the business’s long-term viability.
Conclusion
Diversifying your income and having a well-rounded client portfolio are not just sound strategies – they’re crucial for thriving and growing your business.
Begin taking steps now to reduce dependencies and fortify your business for a stable and prosperous future. Stability isn’t just about growing; it’s about growing smartly in ways that minimise risks.
Transcript
Welcome to Beyond the Numbers, the podcast where we take the stress out of business finance and break down the numbers in a way that actually makes sense. Today’s episode is about one of the biggest risks to small businesses: over-reliance on one big client.
If one client accounts for too much of your revenue, you’re building your business on shaky ground. We’ll explore how to reduce that risk and create a more stable, profitable future. Reliance on one makes for a wobbly place to be. Imagine your business as a table with one client acting as the foundation.
What happens if that leg is pulled out? The whole thing collapses.
The dangers of over relying on one client means that a major income gap can occur if they leave. It also means we’ve got reduced bargaining power; you are at the mercy of pricing and payment terms, and any late payments from them or contract changes can cause financial chaos.
If one client leaving would devastate your business, it’s time to rethink your strategy. I once worked with a business where 60% of their revenue came from one client, and when that client downsized, the business struggled to survive.
Things to consider maybe to make sure that contracts are robust and safeguard against a sudden client exit, maybe there’s a three-month notice period, and also that gives you time then to forecast forwards, work out some other strategy plans, regularly assess the risk of clients leaving, and also the impact of losing them on your cash flow.
Establish ongoing communication and feedback loops with clients to spot potential risks early, and build reserves if you are relying on a few larger clients so that you have an emergency fund and buffer.
Now it’s not something we want to consider; however, if your big client does leave unexpectedly, it’s essential to act immediately.
You need to quickly assess your financial situation and forecast your cash flow, start to identify cost-saving measures, and this may include difficult decisions like redundancies, communicate promptly and transparently with your team about changes, and really focus marketing and sales efforts aggressively on those quick win opportunities.
A client who lost their largest contract immediately adjusted their cost structure, which sadly meant reducing their workforce temporarily. Difficult as it was, this swift action stabilised cash flow, ensuring long-term survival.
The key here is, acting fast and decisively helps protect your business in a crisis. Now let’s talk about what a healthy revenue mix is. Ideally, no single client should account for more than 20% of your income, but many small businesses have one client making up 40, 50, 60, or even 70%.
So, you won’t be alone if you’re thinking that’s you. Now, a balanced revenue mix provides stability, so if one client leaves, your business remains strong, and having multiple streams of income protects that cash flow.
I worked with a business that had increased their profit by 30% in one year, but guess what? Their profit had actually dropped because they took on too many low margin clients; they were working harder for less money. So, let’s look at an example. If you have a business at a million turnover and 70% of the income is made up by one client, so now taking your total income of a million, if your largest client is 70%, that means you’ve got £700,000 of income from this one client alone.
Now if we’re trying to get to that 20% figure, that means that we’ve got to get to an incredible £3 million, now really that’s not going to be realistic. So, actually, we need to look at other ways to stop this reliance on just this one customer rather than generating additional income.
Now some of that may be to look at some of the product lines and the gross margins that we’re delivering to this client here and consider whether actually that’s contributing to our profit margins or not.
So, would you rather have 10 clients contributing 10% each to your revenue or one client contributing 90%? One gives you stability, the other puts you at constant risk. So, how can you build a strong pipeline?
You need to consistently generate leads, don’t wait until a big client leaves, diversify your income streams, and start looking at different products or services, and make sure you strengthen your marketing efforts. Stay visible even when you’re busy.
A business that relied on one big client started introducing a subscription model. Within a year, they had multiple smaller revenue streams and no longer depended on one big customer. Building a pipeline takes time, but it protects your business long-term. The over-reliance doesn’t just relate to customers.
This isn’t just about clients; being overly dependent on one supplier, one key team member, or one marketing channel creates the same risk. That’s where John Warlow relates to the Switzerland structure.
One client, you need to start diversifying your customer base. One supplier, you need to have backup vendors in case of shortages.
And one team member, there could be different ways to either cross-train staff and document processes, and lead sources will spread your marketing efforts across multiple channels. So if one thing can take down your business, you need to build a backup plan.
So how can we look to retain and reduce reliance on employees? Now there’s different ways to do this. So for retention, some of the options could be to look at share option schemes, long-term incentive programs, and bonuses, looking at flexible hours, extra holidays, even to training opportunities, and development opportunities.
And ways to actually reduce the reliance on them is to implement cross-training, looking at automating some of those easier things and document your version of the vibrant way.
The next thing up is suppliers. If the supplier went out of business, then if it would cause a major impact, you need to look at diversifying; no one supplier should dominate.
Now next episode, we look at the one-page plan every business owner needs, keeping you on track and keeping overwhelm at bay.
