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Why Your Best Client Could Be Your Biggest Business Risk

Why Your Best Client Could Be Your Biggest Business Risk

Tuesday, April 12, 2016/Categories: business-tips

Does your tech business revenue depend on one star client?

A lucky break with a big client can power your tech business, especially when it's first starting out. But if that client suddenly disappears one day, you could be left in the dark without revenue or a plan. That’s the risk of putting all your eggs in one basket. The scary thing, though, is that a 42 percent of IT businesses are in that very position.

42% of Small Tech Businesses Rely on One Client for the Majority of Their Revenue

From application data we gathered from the small tech businesses that apply for coverage with us, we learned that 42 percent attributed more than half of their revenue to a single client. That’s a big technology business risk. Why?

Imagine you net a whopper of a client, and it's a total game changer. The client injects a massive amount of revenue into your business, and like some sort of supercharged robot, you go into overdrive. You do everything you can to provide them with the best service possible. You’re basically business besties.

Then one day, out of nowhere, the client leaves. Their needs have changed, and you don’t fit the bill. It’s heartbreaking. Even worse, it’s potentially business-breaking. Without their business – and their seemingly bottomless wallet – you’re without enough income and forced to make some tough decisions about your future.

Sound improbable? It’s really not.

Why Client Concentration Is a Big Risk for Tech Entrepreneurs

A big client that provides most of your revenue could drop you like a bad habit. It could happen for a number of reasons:

  • The client's company could go under.
  • The company could be acquired.
  • Your contact could leave the company.
  • Another business could sweep in with a cheaper offer.

It happened to Paddy Padmanabhan (@PaddyPadmanabha), founding principal and CEO of consulting firm . After years of experience working senior-level positions at companies like GE Capital and Accenture, he started a company to provide consulting for healthcare and tech companies. He offers a word of warning based on his own experience:

“Customer concentration is an issue even for large firms; however, it can be really acute for microbusinesses. I know,” he says. “My largest client last year dropped to zero this year because the CEO with whom I had a strong relationship left the company.”

His advice? “The only solution for small-business owners is to consciously work on diversifying their client base.”

Technology Business Tips for Diversifying Revenue

Business growth strategist Marian Temesvary writes that a firm should do two things if a large chunk of revenue comes from a single client:

  1. Proactively develop the business. This includes clarifying your positioning and what makes your business unique. After you figure that out, make a marketing strategy and educate potential clients about who you are and what you specialize in.
  2. Actively diversify. Maybe your big client is the only one who wants a specific service you offer. If that’s the case (and even if it’s not), figure out other ways your business can make money. Leverage your knowledge, your software, your relationships, or anything else that may open up more revenue streams and additional clients.

Padmanabhan adds a rule of thumb for thinking about your revenue: if you’re getting more than 10 to 25 percent of your revenue from one client, you should start diversifying.

Can Technology Business Insurance Help When You Lose a Client?

Your technology business insurance can help with many disasters – property damage or professional liability lawsuits, for instance – but unfortunately, there’s no insurance that can cover your finances when a client leaves you in the lurch. That’s why diversification is so important for small tech businesses that want to stick around long term.

For more technology business tips, check out “3 Professional Development Tips that Can Land Your Tech Business More Clients.

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