Customer Concentration: The Quiet Price Killer

Customer concentration kills price quietly because nothing feels broken while it builds. The big customer pays on time. The work is steady. Then a buyer runs one division problem and offers less than the owner expected. This article explains the number he runs and what you can do about yours.

The short version

When one customer is a large share of revenue, the buyer is not buying your business. He is buying that relationship. He knows the cash flow depends on decisions made inside one other company. So he prices the risk of losing it.

That pricing shows up in plain ways. The offer comes in below the range the owner hoped for. Or part of the price waits on the big customer staying. Or the buyer simply walks and buys a steadier business instead. None of this requires the customer to be unhappy. The discount is the cost of a single point of failure.

The number buyers compute first

Buyers start with your largest customer as a share of total revenue. They call this your top customer share. Then they add your five largest customers together and compute the same share. That second figure is your top five share.

You can compute both in about one minute. Pull revenue by customer for the last twelve months from your accounting software. Divide the largest customer total by your total revenue. Then add the top five totals and divide again.

Say your revenue is $1,600,000 for the year. Say one customer accounts for $480,000 of it. Your top customer share is 30 percent. A buyer sees that figure before he sees almost anything else.

Where the questions start

There is no official scale for this. What follows is how buyers typically reason, drawn from how offers actually get built.

• Under roughly 10 percent. Few buyers raise it. The mix reads as healthy.
• Past roughly 15 to 20 percent. The questions sharpen. Buyers ask about contract terms and about who holds the relationship.
• Past 30 percent. Most buyers discount the price or demand structure that protects them. Structure means part of the price depends on the customer staying.

Contract cover can soften the reading at any level. So can a relationship held by your team rather than by you alone. A high share with neither protection is the hardest mix to sell at full price.

Two firms, same profit, different prices

The gap in this example is $400,000. Real gaps vary with the trade and with the buyer. The direction rarely varies. Concentration costs the seller money that steady profit alone cannot win back.

How to fix it

The fix is unglamorous. It also works, given time.

• Win mid-size accounts on purpose. Set a sales target for revenue outside your top customer. Chase accounts big enough to matter and small enough that losing one is survivable.
• Put the big relationship under a written contract. Ask for a real term with renewal language. A signed term gives a buyer something he can underwrite.
• Let time dilute the share. The share falls when the rest of the book grows. Hold the big account steady and grow everything around it.

Be honest with yourself about the calendar. This repair takes seasons, not weeks. An owner who starts two years before a sale arrives with a different business than an owner who starts two months before.

When selling anyway makes sense

A concentrated business is not unsellable. Sometimes selling now beats waiting years to dilute a share. Three conditions make the case stronger.

• The big customer is under a written contract with real time left.
• The relationship belongs to the company and not only to you.
• You accept the discounted math with open eyes.

The third condition matters most. A seller who understands the discount can weigh it against his own timeline. A seller who meets it for the first time in diligence usually cannot.

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