The idiom “don’t put all your eggs in one basket” is normally attributed to Miguel de Cervantes, author of Don Quixote. This phrase also represents good advice to follow in business: focusing on just one or two customers or clients, no matter how lucrative, isn’t a financially sound idea.
Customers generate revenue and give businesses a reason to exist; but too few is a risk.
Imagine this scenario: Company ABC has only one customer, but it’s a big one that buys all available product. What if this business suddenly closes—because of a pandemic, natural disaster, or the owner retires and no one wants to buy the company?
Company ABC then has to scramble to find a replacement or risk losing everything. But if Company ABC had multiple customers, of varying sizes, the loss of its biggest customer would still be a blow, but not the end of the business.
Having a balance of customers—small to large, seasonal to year-round, geographically near or far, etc.—is crucial to long-term success.
Is Less More?
Although a healthy mix of customers may be ideal, there are advantages to dealing with a smaller number of clients.
With a concentrated customer base, a business may perform better. Regular orders and a simplified supply chain lead to efficiency, allowing the company to spend less on both selling and administrative expenses.
Researching and acquiring new customers takes both time and money. The more clients in a company’s portfolio, the more time must be spent on cultivating and maintaining these relationships. Marketing and sales efforts can be expensive.
Inherent dangers
With fewer buyers, companies can certainly achieve a decent bottom line—until they don’t.
Depending on a few accounts can put any company at risk. An economic slump in the industry, precipitated by a pandemic or any other significant factor, might leave clients stranded with little or no income. When the selection of customers is varied, losing one or two generally won’t result in bankruptcy.
“By not diversifying our customer base, we’d be at a disadvantage with other shippers that do,” explains Rod Sbragia, director of sales and marketing at Tricar Sales, Inc., BB #:106364 in Nogales, AZ.
In a scenario where a business owner is ready to sell, having the company reliant on just one large customer and two smaller ones may not impress investors; it may scare them away.
If a sole customer represents 60 percent of annual revenue, investors or buyers may find this too much of a gamble and look for a similar business with a more extensive customer base, thereby greatly decreasing risk.
“If an organization depends on a limited number of customers, it may find itself in peril for a few reasons,” explains Mark Hayes, president of Twin Garden Sales, Inc., BB #:119080 in Harvard, IL. “One of those fears is there are periodical buyer changes.”
Indeed, a customer’s turnover can mean less or even lost business if a new buyer has forged preferred relationships with other suppliers. “Other reasons,” Hayes continues, “include quality inconsistencies and lack of product at important times of the year.”
Without a diverse group of customers, any business can stagnate with little opportunity to grow, affecting its future.
This is an excerpt from a Credit & Finance feature in the September/October 2021 issue of Produce Blueprints Magazine. Click here to read the whole issue.
