Are Big-Name Customers Good for Your Business?
When prospecting for new customers, it is usually very positive to note that most businesses already have one or more "big-name" customers in their stable. The prospect will likely believe that the large company chose them based on their superior products or services, and assume that they are a credible supplier. It just may cinch the deal, right?
Besides credibility, large clients bring prestige and significant revenues to a business. And the scale of serving a large customer may lower product costs or allow the owner to purchase production equipment. For example, a manufacturer's unit costs typically decline with larger throughputs. The scale of business may also justify the addition of skilled personnel, office equipment and technology – making a business more attractive to other prospective customers.
However, from an overall business standpoint, what are the risks of a single customer comprising a high percentage of the revenues? Consider these possible downsides:
- Stretched resources - If too many resources are dedicated to the large customer, smaller clients will feel ignored and begin to depart.
- Lack of profits - Analyze margins on the large clients. Sometimes we give away our margins in favor of big volumes.
- Debt - Do not go overboard meeting the demands of the client by going into excessive debt. If they drop you as a vendor, the debt remains.
Of course, many small businesses can't help but have a handful of customers who generate a large percentage of the company's revenues. There's nothing inherently wrong in that. However, don’t let the 80/20 rule of thumb make you a slave to one or two large customers.
The 80/20 rule maintains that 80% of a company's business comes from 20% of its customers. And a common strategy asserts that a company should coddle its "best" customers, at the expense of its smallest.
Like many "rules of thumb," it's not that simple. Small- and medium-sized customers are important, too. Here's why:
- Smaller customers often deliver better gross margins. They have fewer choices and don't have the negotiating power of large customers.
- A relatively large number of smaller customers bring stability to a business. Treat them well and they will stay and spread the word to others. Loyalty is important to them, and they won't change vendors if they are content. Furthermore, smaller companies are targeted less frequently by competitors – they are too busy chasing the big fish.
- A sizable base of smaller customers makes a business owner less susceptible to the loss of a big-name customer. And lenders shy away from companies that appear to be too dependent on a few customers.
If more than 30% of sales are being done with any customer, it may spell trouble. From a risk viewpoint, it's best to have no customers accounting for more then 10% of revenues.