customer concentration
Also called: revenue concentration
How much of the revenue depends on a few large customers. High concentration gives those customers power over the product and puts the business at risk if one of them leaves.
Customer concentration is how much of a business's revenue depends on a few large customers. It's usually measured as the share of revenue from the largest customer, or from the top five or ten.
High concentration is a risk in two ways. If a big customer leaves, a large part of the revenue leaves with it overnight. And long before that, the customer has power: they ask for discounts, custom features and special terms, and the product slowly bends towards one account instead of the whole market. Buyers of a business know this, so they pay less for a company where one customer brings in a large share of revenue; many get nervous somewhere around 10–20%.
Large customers aren't bad; they are often the most profitable. The goal is to take them on terms that keep the product standard: a volume price instead of custom work, the same product everyone else gets, and a gradual start so that no single account becomes a third of the revenue at once. Watch the top customer's share every month, the same way you watch churn.
Example
In November GarageDesk's MRR is 37,400 UAH. Victor, owner of a franchise of 40 shops, wants all 40 connected at 400 UAH each (16,000 UAH a month), plus custom integration with the franchise's accounting and its own branding. The franchise would be 16,000 / (37,400 + 16,000) = 16,000 / 53,400 ≈ 30% of MRR.
The founders offer the standard product at a volume price of 450 UAH for each shop that signs up, without custom work. The franchise starts with 8 shops: 8 × 450 = 3,600 UAH, about 3,600 / 41,000 ≈ 8.8% of MRR if the rest stays at 37,400 UAH.
Common mistakes
- Saying yes to custom work for one big customer. It turns your product into their project.
- Measuring by customer count. One account can be 1% of customers and 30% of revenue.
- Pricing the big deal below cost of service. A volume discount should still leave a healthy margin.
- Forgetting it at sale time. Buyers will check it in due diligence; fix it before, not during.