Too Many Eggs In One Basket? Diversify Your Customer Base to Eliminate Risk

  •    A freelance reporter and writer based in Philadelphia, Pa., Dinah previously worked as a staff reporter for The Associated Press and Dow Jones Newswires.

If losing a major customer would deal a threatening blow to your business, force serious cost-cutting or otherwise send you scrambling, it's probably time to expand or diversify your client base.

Small businesses often succeed by building strong client relationships, but may become too reliant on long-standing accounts and overlook the vital work of generating new customers.

While it's natural and critical to nurture your loyal patrons, relying too much on one or two key customers, or a particular client category, can expose your small enterprise to a cash crunch or worse if the orders should stop.

In addition to the possibility that a key customer might decide to take business elsewhere, they also could disappear for any number of other reasons outside your control, including natural disaster, industry slow-down or their own financial problems.

Finance consultants often cite the following paradigm: If one customer accounts for at least 10 percent of revenue, or your five largest customers represent 25 percent or more, your business has "high customer concentration."

Catalytic Management Consulting Principal, Shelley F. Hall, wrote for the Society of Actuaries that "an alarm should go off" if no more than 30 percent of your clients account for 50 percent of your business.

Your mileage may vary, depending on the type of business you operate, but the general concept applies.

Customer concentration has its advantages and, of course, it makes great business sense to forge solid, healthy relationships with your top customers. Reaching out to new clients and markets, however, can fortify your venture against the hazards of placing too many eggs in relatively few baskets.

Years ago, the MIT Sloan Management Review cited the case of a catalog retailer that decided to focus on strengthening ties with its "loyal and most profitable customers, only to find that it was not bringing enough new customers into its portfolio to grow the business over time."

By all means, keep doing your best for your best clients, but explore these five ideas for broadening your customer base:

  1. Seek referrals and testimonials. Ask current customers to refer you to others who could use your services, and if your website doesn't already feature client testimonials, you might request those as well. Case studies highlighting how your company helped key customers may also attract new business.

  2. Polish your online presence. Speaking of your website, look it over — or have a trusted colleague, adviser or consultant review it — to make sure it looks professional and highlights your firm's strengths. Explore the tools available for your site to make sure you're taking advantage of key apps and other features that may help you boost business.

  3. Explore new marketing paths. Look into strategies you might not have considered previously. Confounded by the idea of social media marketing? It doesn't have to be all that complicated, and may bring your venture to the attention to a new set of potential customers.

  4. Expand your offerings. Can you build on your existing expertise to offer new products or services? If so, this is another tack for wooing new customers, possibly including those from new markets, and for expanding your relationships with existing clients. You might accomplish this on your own or by working in partnership with another business. Look for opportunity in any unmet needs in the market.

  5. Identify more plum clients. Go after customers who are similar to your high-value clients. While this may not diversify your base, it could well expand it. Hall recommends that you identify your most valuable clients by analyzing each one's contribution to margin, growth potential and strategic fit, then look for common characteristics between your top customers to give you an idea of the type of prospects you might pursue.

Diversifying your customer base doesn't mean aimlessly seeking any and all opportunities. Look at what makes the most sense for the health of your small enterprise in balancing the care of your strong, steady customers while actively cultivating fresh business.