Bad Habit 3: Relying too Much on Big Clients
You've heard the idiom "Don't put all your eggs in one basket."
Our survey of tech entrepreneurs found that among small businesses, 42 percent generated more than half of their revenue from one client. That's a lot of eggs in not very many baskets.
Over-relying on one big client is a classic case of having all your eggs in one basket.
A client with deep pockets sounds great. You can keep going to the well and don't have to waste your time looking for new work. But there's a little more to the story.
Relying on one large client comes with serious risks, including these:
- The client could leave and take with them a major source of your revenue.
- The client could demand you change your product to fit its needs.
- You could spend so much time serving one client that you miss out on other opportunities that will pay out more in the long run.
We talked with one entrepreneur who learned this lesson the hard way. Here's his story.
Case Study: The Risks of Client Concentration
Paddy Padmanabhan (@PaddyPadmanabha ) had two decades of business experience, holding senior positions at companies like GE Capital and Accenture, when he decided to start Damo Consulting (@damoconsult ), which provides management consulting to healthcare and tech companies.
As an entrepreneur, Padmanabhan enjoys the bird's-eye view of the tech industry that comes when you've worked at a major consulting firm. That means he's not only seen other businesses threatened when they don't diversify their client base, he's also felt his own business threatened.
"Customer concentration is an issue even for large firms; however, it can be really acute for microbusinesses. I know — my largest client last year dropped to zero this year because the CEO with whom I had a strong relationship left the company," Padmanabhan says. "The only solution for small-business owners is to consciously work on diversifying their client base."
Padmanabhan reports that his business bounced back from that revenue shock, but many business owners are not so lucky. A sudden cash crunch has led many entrepreneurs to declare bankruptcy.
Diversify your client base or face the possibility of losing your main source of revenue.
Client Diversification: Why It Matters for Tech Entrepreneurs
You're probably familiar with the term "diversification" as it applies to a stock portfolio or retirement account. If too many of your investments are tied to one company, you put your finances at risk. When that company takes a hit, your whole portfolio could go down the drain.
Ditto for your clients. As Paddy Padmanabhan's story tells us, you can't rely on one client to be there forever. Even if you're chummy with the CEO, lots of things could go wrong:
- The company could fold.
- The company could be acquired.
- Your contact (even the CEO) could leave the company.
- Another contractor could lowball your offer.
If you're one of the 42 percent of small tech businesses that get at least half their revenue from one client, the best way to protect your company is to diversify your client base.
Strategies for Broadening Client Concentration
In the early stages of your business, you may have no choice but to rely on a few clients to be major sources of revenue for your business. That's okay as a starting point, but it's not where you want to end up.
Paddy Padmanabhan suggests you shouldn't get more than 10 to 25 percent of your revenue from your biggest clients. That's a helpful rule of thumb.
Use the strategies outlined in "How to Make Business Connections When Working on Your Own" to find new connections that can turn into clients.
Rule of thumb: No more than 10% to 25% of your revenue should come from your biggest clients.
Next: Risk Management Checklist for IT Startups and Freelancers