Business owners love to boast about their customer base. From the well-established customers with marquee names to the clients who are more like family than business connections. While these types of relationships are great to have, sometimes having too many customers of the same size or type may represent a risk to the business, which will cause it to suffer in the long run. To avoid common pitfalls related to their customer list, owners should review their list often and attempt to diversify the amount of clients they have, as well as the relationships those clients have with the company as a whole.
Let’s first take a look at the large customers with marquee names. Business owners are correct in believing that large, well-established customers add value to their business. It is great to say giants such as Apple and Google are customers, because they represent large, stable and likely reliable businesses. However, if too much revenue comes from a few of these companies the business could be at risk. For example, a business owner recently explained 80% of their sales came from Fortune 500 companies. Upon further inquiry, however, we learned 80% of sales came from only three customers. This is a huge risk, because if any one or two of these customers would leave, sales would come crashing down like a skydiver with broken parachute. There are many reasons why such a customer would leave: innovation in their business could mean the product or service may no longer be required or personnel changes in their business could mean their new purchasing agent has stronger relationships with a competitor. The world changes and so will customers. So like a good investment strategy, businesses should do their best to diversify their customer base.
Similarly, customers who have strong personal relationships with an owner could represent a risk to the business, when the time comes for the owner to sell or transition. If the customer relationship is concentrated with the business owner, a change in the relationship will likely prompt the customer to re-evaluate the relationship with the company as a whole. In the case where the owner is trying to sell the business, this relationship transition would seem risky to a buyer, especially if the majority of the revenue is derived from relationships where the business owner is the main, if not only, point of contact. To reduce the risk, business owners should introduce clients to multiple people at the company and develop a team approach when working with a customer. This way the business owner is not the first and only person a customer would call. There is also the added benefit of freeing up the owner’s time that he or she previously spent on those relationships to grow and enhance the business. Additionally, when a customer knows more than one person they can contact when they need help, they will feel more connect to the company overall instead of just one person.
A strong customer base is one that is well diversified, where the relationship is transferrable, and it is not contingent on a personal relationship. This type of customer base will be stronger in the long term, add value to the business and facilitate a successful transition to a new owner when it is time for the current owner to retire or move on to their next endeavor.
Rich Gunn leads BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich is a Certified Exit Planning Advisor and a member of the Exit Planning Institute.
The Business Owners’ Special Series (BOSS):
The Business Owners’ Special Series (B.O.S.S.) is made up of several informational articles for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business. Be sure to keep reading, if you desire to develop your business to its maximum potential value and gain an understanding of how and why beginning the process sooner results in building greater value.