The Reliance on One Customer is Putting Your Business at Risk
Sharon: Good morning, everyone. This is Sharon Heller, and I'm here today with Steven Kohnke from Denver Business Coach. Hi Steven.
Steven: Hi Sharon, how are you today?
Sharon: I'm good. I'm looking forward to getting some great tips and information from you today. So what's our business topic of the day?
Steven: Today, as you know, Sharon, we've been doing some qualitative research in polling business owner's understanding whether they're showing up or they're not, especially during this year.
We shape our responses into these conversations that we've been having here. And the topic for today is really understanding "what would happen to the business if the business lost its biggest producing customer or client?" So producer for the top line revenue.
Sharon: Wow so important question for us all to be asking ourselves, can you say a little bit more, though, like what that question actually means?
Steven: Yes. So when we're asking people what would happen to your business if you lost your most important customer? And what we're really asking is how at risk is your business? So it's really a question about risk. The more reliant your top line is to your number one producing customer, the higher of a risk factor you have, and the lower valuation your business actually receives.
So what we're looking for here is best practices says 15 percent at the very most as a contributing factor to your top line from any one customer. And that is probably the highest that we would consider a lower risk business from that revenue-producing standpoint.
Sharon: Ok, so given that, can you say a little bit more about why it's so important to diversify? Because on one hand, if I've got some incredible clients that are funding like 90 percent of my business and we've got to sell me on this one a little bit more.
Steven: Yeah, absolutely. Well, to put it simply is the business world is so unpredictable right, and we're definitely experiencing that this year with COVID. So if you're a bookkeeper and you're in the example there, your number one client is producing 90 percent of your revenue, but they're a business, take a Spa, for example, that really needs to have in-person high volume, high touch in there, and they have to shut down. And the shutdown means either they have to let go, people can't produce as much, can't pay the bills. And they say, sorry, Sharon, we can't use you as a bookkeeper anymore. We really have to figure that out. There goes 90 percent of your revenue and then you're scrambling to figure out how to do that. That sounds too stressful, right?
Steven: So if that happens to you and you have employees that are working on that account, that means you have to let go of those employees and then you yourself are way more at risk of shutting down yourself, of actually having close the doors. Now, if you take that and use the best practices of 15 percent, as is your top client, and that top client goes out of business: 15 percent, it's going to hurt a little bit. But you're going to be fine.
Steven: Being able to replace 15 percent of your business from that top-line revenue standpoint is going to be way easier than trying to replace the 90 percent in that example. You should be able to retain most, if not all your employees if you have them, and you can keep moving that way. So it's really being able to reduce the risk there.
Sharon: Yeah. So I'm starting to really see your point and get the importance of it. How do I go about diversifying my client base, especially if a huge portion of my time is being spent taking care of these like high volume clients that I have?
Steven: That is a fantastic question and a difficult one, too. I think probably the best advice I can give here would be don't get too comfortable. I've seen that happen with people getting too comfortable with that one client and then having them go away. It's always be looking and always be producing and keeping your target market and pricing consistent to that's going to be a major factor in reducing this risk and reducing the income that's coming in.
Steven: It can be very tempting to jump and say, hey, there's one big client is a little bit out of what my range is that I'm comfortable with, but they're going to be giving me an extra ten thousand dollars a month when I'm used to making five. That's a huge opportunity to say yes to. But if you're not looking at that consistently, you're going to put yourself at way more risk. And some people are OK with taking that risk, but just know that it is a much higher risk.
Steven: So really being able to talk to that client and say, you know, this is what I can do and this is the price that I'm going to charge you for, rather than saying having them offer you 10 grand extra and you're saying, yes, that's great. I'm just saying, hey, this is what I charge. This is the work that I do and this is what I charge for. And that's what I can do for you. If we want to do more, we can figure that out down the road. But in order to keep that consistent growth of income and not be at a high risk of doing so, it's just keeping things consistent and growing in incremental standpoints for that.
Sharon: That all makes really good sense. A really valuable conversation today, Steven. Anything you want to add before we close today?
Steven: Yeah, sure. At Denver Business Coach, that is what we do, we help businesses reduce the risk, not only with this particular topic of which we're talking about today but across a variety of them. Our objective is to make sure that your business is less risky and gets a high valuation so you can feel more comfortable, less stressed running the business. If this is interesting to you, just visit us at DenverBusinessCoach.com and we can set something up.
Sharon: Awesome, thank you is great talking to you today, wishing you well.
Steven: Thank you.