Forty-two percent of small IT businesses that apply for coverage with TechInsurance share one risky trait: half or more of their revenue comes from a single client. (Learn more about it in our eBook 3 Common Habits That Bite into Startup Profits.)
If you're also in this boat, the loss of a major client can be devastating for your business. This is why diversifying your client base should top your business's to-do list for 2017.
We talked to a few small tech business owners to learn how the loss of a major client impacted their business. We also asked them to share some business growth tips, including how to break the cycle of becoming too reliant on a handful of clients.
It's Not Personal, It's Just Business
If you're a fan of the TV show "Mad Men," you may recall that the fictional advertising firm of Sterling Cooper Draper Pryce (SCDP) banked heavily on one major account – Lucky Strike Cigarettes. For years, that company generated the majority of the firm's revenue and also served as its calling card. And then one day, SCDP lost the account. Sensing that the firm may be crashing and burning, another major client, Glo-Coat, also bolted. The most frustrating part for the firm is that neither client left because they weren't happy with the quality of the work. They each decided to go with a different agency simply because they felt like making a change. Because hey, that's business.
Just like SCDP, if a large percentage of your revenue comes from a single client, you are taking a major risk. You never know when a client might decide to pull a disappearing act. It could be because…
- You were late on a project.
- The client wasn't happy with something you did or didn't do.
- There's a change in management and the new person decides to "go in a different direction."
- They go out of business.
The point is you never know when your biggest source of revenue could suddenly drop you.
So You Lose One or Two Clients – What's the Worst that Could Happen?
Let's say your tech business has one client that generates the majority of your revenue. What could happen if they suddenly give you the "it's not you, it's me" speech?
"This is something that is prevalent in the web development industry, and we dealt with this when we started Geeks Chicago," says
(@geekschicago). "Many digital agencies get started because they land one or two big clients and fall into a comfort zone without focusing on growth. When they lose one or both of these clients, they take a hit on 40 to 60 percent of their revenue and go into panic mood. I saw many firms go under because of this model."
Prior to founding
Planning Pod (@planpod),
ran a small marketing / advertising agency for about a decade. When some large clients left, it hit the firm hard – forcing it to let people go.
"We had a few large clients who provided about 70 to 80 percent of our total revenue and a couple dozen or so smaller clients who had occasional projects that contributed to the rest of our revenue," says Kear. "In one year, we lost two of our three largest clients. Not only did it cut our revenue by 60 percent, but we had to lay off more than half our staff. It took us two years to get back to that level of revenue and billing, but the scars that experience left will never fade as we had to let some great, hardworking people go."
Relying on One Large Client Can Overwhelm Your Business
Andy Ross Designs,
runs his own web design and development company. A few years ago, he landed a major contract from a Fortune-100 Company.
"Our first order for work was like $40,000, and prior to that we had been getting $4,000 and $5,000 jobs and thinking of those as Christmas in July," says Ross. However, Ross said working for one huge client quickly overwhelmed his small business.
"We didn't really have the cash flow at the time to hire anybody," says Ross. "So while we were working on big jobs for this company and making really good money, this also set up some big problems for our business."
Because of the sheer volume of work, Ross' salesperson had to pitch in and help. This meant she had no time to nurture existing client relationships or prospect for new business. Pretty soon they were working for the big client almost full time. Then six months later, the client brought in a new CEO. Major restructuring and downsizing followed, resulting in Ross losing the contract.
"We were pretty much unemployed," says Ross. "I tried to take that as a lesson to not deal with clients that are too big or not to concentrate too much on one company for your work."
How to Embrace Client Diversity
You get that you need to diversify your client base. But how do you pivot away from a business model that's heavily reliant on one or two major clients?
Take the three-legged stool approach: "My most successful strategies have always centered around a 'three-legged stool' approach," says
Quicksilver Software, Inc.
(@QuicksilverSoft). "I try to keep at least three major projects going at any given time, so starts and ends tend to overlap and I'm less frequently stuck with too many spare resources or too many things to do at once."
Network, ask for referrals, and nurture leads: It will take time to build relationships, and your billing numbers may dip for a while, but you will be able to sleep easier knowing that if one client walks, you'll still be in business.
"When we created our current company, we decided to focus on building a large pool of smaller customers, and it has made all the difference with regard to having more stability with our revenue streams," says Kear. "If you can swing it, having a customer base of dozens, hundreds, or even thousands of customers means your company is much less vulnerable to losing one or two or even a handful of customers."
Explore other markets beyond your normal niche: "Be tuned into new market opportunities," says
(@emazzanti). "Focusing on a few verticals is good marketing, but having a couple of clients in developing markets, ones that you'd like to investigate, helps you to prepare for expansion in that direction when the time is right."
In the coming weeks, we'll offer more tips on how to diversify your business and land new clients. Stay tuned!
About the Contributors
William C. Fisher is president and founder of Quicksilver Software, Inc. He is one of the first generation of video game designers, having started with Mattel Electronics in 1981. His interests range from strategy game development to simulation-based training and artificial intelligence design to usability and user interface design. He is intensely interested in developing products that enhance learning in science, technology and mathematics (STEM). He maintains an active role in guiding development of the company’s projects.
Jeff Kear is founder of Planning Pod, an online startup that provides web-based event management and registration. This is his fourth small business startup and he loves providing sales and marketing advice and guidance to other entrepreneurs and small-business owners who are looking to grow.
Carl Mazzanti is the founder and CEO of eMazzanti Technologies, a premier IT consulting firm and MSP throughout the NYC metro area and internationally. A frequent business conference speaker and technology talk show guest, Carl has often contributed at Microsoft-focused events, including the Microsoft Worldwide Partner Conference.
Andy Ross is a web and graphic designer in Ann Arbor, Michigan. He has worked on projects for Cadillac, University of Michigan, GM, BASF, International Truck, Ford, MASCO, and many other clients. Find him at www.andyrossdesign.com.
Mark Tuchscherer is the cofounder and president of Geeks Chicago, a web design and development firm based in Chicago. Mark has over 16 years of experience in the digital space, working with clients of all sizes in many different verticals.