Operating a small business is fraught with risks and uncertainties, as well as the potential for tremendous rewards. At first glance, one of the most tantalizing of those rewards is that large, major client that you finally land. Casting your lot with a significant player in any field can provide you with a welcome sense of security and the prospect of consistent cash flow. In some cases, a strong relationship with a large, well-branded client can also work to entice other companies to seek you out. Yet that newfound security that you may be feeling can also lead to major concerns.
From Company Owner to Contractor
If one individual client makes up more than half of your income, then you become more of an independent contractor than a business owner. True business growth is dependent on a diversified client base, rather than one behemoth contract that leaves you vulnerable to the whims of that large client. In general, there are several categories of disadvantages of working with too few clients. Among them we can find:
- Loss of a client can be a major strike to your business.
- Next generations of younger people often look to replace parts of the business, making it likely something will change in your disadvantage.
- Keeping your one large client happy can prove difficult at times, and time-consuming manner taking far more resources than would be to collectively keep happy a dozen of smaller clients. Relationships take time and work. Loads of it.
- Price negotiation can be a tricky one. For instance, Ikea is asking for long term contractors to decrease prices so they could keep lowering prices for final customers assuming the contractor over time develops efficiency saving time and money to all interested parties.
- Association with one large client can be a pro, but should the client be arrested or should he be publicly sued, the damages can easily spread to your company as well. It is not so long time ago that Monsanto jr. was arrested for the killing of David Gonzalez in 1997, and whole family business receiving a very bad reputation in the process.
Even if you have your own employees, you could still be playing the role of the subcontractor for this larger business, enabling your client to avoid the risks of adding payroll in an area where the workload may be inconsistent. At the same time, this risk is transferred to your company and your personnel.
As long as there is a consistent need for your product or services, this arrangement could work out fine but should slack periods occur, you are left to pay your staff with precious little work to show for it. In a worst-case scenario, this client could cancel its contract or elect not to renew your arrangement, leaving you scrambling to find replacement business.
Big customers also have a knack for throwing their weight around. They sometimes use their size as justification for slow payments, renegotiated prices or alterations to delivery terms. Since much of a business owner’s time can be spent satisfying that one large client, it is difficult to find the hours and resources necessary for bringing in smaller pieces of more diversified revenue.
At the same time, banks are wary of a heavy concentration on one customer as well. Not only do they look at profitability and cash flow, but they also evaluate the specific source of that revenue stream. They don’t like the unpredictability of that one large customer when considering their risks of lending for business growth.
Mitigating the Large Client Risk
Obviously, it’s difficult to turn away business from a large client that could greatly strengthen your balance sheet. But how do you maintain that relationship, while also chasing other revenue sources…smaller clients that offer greater diversity and a stronger bench?
The best way to achieve both is to reduce the maintenance of your large client, with easy-to-use cloud accounting software like ZarMoney. It also means removing some of the risks so that you can spread your company’s talents and resources around.
First of all, it’s important to embed your company into the client’s operation, establishing a real need for your services that makes you a necessity rather than a nice luxury. Once you’ve created a certain stickiness to your services, you become much more difficult to replace.
It also pays to look closely at your contract, including its length. The longer that you can extend that contract, and the more safeguards you can place into it, the better your chances are of mitigating your risks.
As you’re trying to diversify your client base, you can also do the same thing within your client’s company. In other words, don’t tie yourself to just one contact within the firm; make allies throughout the company, in various departments and divisions. This way, if one department experiences a slowdown, you can keep the business engine running through projects in other sectors of the enterprise.
Profit Matters, So Measure It
Finally, rather than only measuring the revenue, take a longer look at the profitability. Are you getting a respectable profit for all of the work that you’re putting in on this one client? Considering the risk you are taking by giving this client the weight of your attention, are the rewards more than making up for it?
The key to running a successful business is establishing profitability while minimizing the uncertainties. So, while servicing this large customer, it’s important to maintain the original mission of your company and to seek out a diversified list of supporting clients who can keep your business on track if the big bread train derails.
Not All Is Bad About Having Just A Dedicated Few Clients
Funnily enough, we always want what we can’t have. A super-wealthy man once said: “My cardiologist is so good, I can never get in to see him.”
It is often exclusivity that sells our products or services, as people tend to want the best, especially should it be in short supply. In economic theory, this is called Snob effect.
What are other advantages of having too little client base?
Often stable revenue stream has given that you have developed fee structures for your clients that are given and save all sides time thinking how much will this and that cost.
Prospecting clients is not a priority as you are already kind-of fully booked with current clients, saving up resources to do what really matters - taking care of your clients.
This time saving goes a long way with you, and you can have not only more free time to develop your business, but also for yourself, for training your staff and for the slow yet steady expansion of your business. Quality first.
You can go deeper with your clients. Having too few of them can mean that you know your clients inside out, therefore providing much more insightful services that might have escaped you, shouldn't you know enough about your client's needs.
Family-like relationship. Having a client for a long time, should both parties be happy with cooperation can bring other non-financial success - family relationship. This in turn creates a friendly working environment, increases efficiency and makes your work much more relaxing, making further your staff and customer happier.
Trust is yet another awesome feature of having too little client base. As you work with your client for a long time, you trust each other, and often initial-phase micromanagement eases or evaporates altogether.
Specialize - having just a few strong clients allows you specialize portion of your staff on the given client's needs providing even better services.
And last, but not least, we have in our list association again. This can be both pro and con, depending on how your clients are being viewed in public eyes.
