All businesses have large key customers. Business owners spend a lot of time managing the relationship with these customers because they provide significant amounts of revenue and profit to the business. But a customer can get too big, and cause significant problems for your business when the relationship sours, either financially or operationally.
Here are some examples of what can happen when a company becomes too reliant on one customer:
Company XYZ performed specialized building wiring services for a Fortune 100 Company which represented about 80% of their business. Through the years Company XYZ opened several remote offices to better serve their customer. Then one day this Fortune 100 Company was purchased by a Fortune 50 Company. The newly merged companies now had too much real estate, and temporarily stopped working with Company XYZ. Within 90 days, Company XYZ went out of business because they could not survive the 80% revenue cut.
Because of the economy, a Contractor was desperate for new work. The Contractor bid and won a job that was three times bigger than any job had previously done, and the job was located 300 miles from the Contractor’s normal geographic area. The job proved too big for the Contractor to manage effectively due to the size and distance of the job. The Contractor incurred losses for 18 months as a result of this job.
An Entrepreneur was approached by a large company to set up an installation business to install products manufactured by the large company. Through the years, the Entrepreneur’s business with this large company grew exponentially. The large company represented at least 80% of the Entrepreneur’s business. At some point, a senior manager from the large company approached the Entrepreneur about providing some illegal kickbacks to the senior manager. The Entrepreneur did not want to lose the large company’s business so kickbacks of significant amounts were paid.
A company that has built commercial buildings for the last 30 years decided to get into the residential construction space. The company was awarded two high rise residential condominium projects. These jobs started in 2008 and continued into 2009 and provided a large amount of revenue and income to the company. As the housing market faltered in late 2009 and 2010, both of these condominium projects declared bankruptcy. The company incurred bad debts equal to 25% of sales.
I certainly don’t advise people to fire large customers. The best way to reduce risk is to pick up more customers so that the larger customers become a smaller piece of the pie. Business owners need to always have a Plan B in case a significant customer is lost.
A B2B CFO® can help you manage this risk, as well as other risks in your business.