finance
Customer Concentration Risk
The danger of relying on too few customers for too much of revenue.
Definition
Customer concentration risk is the danger created when a small number of customers represent a large share of revenue. Rule of thumb: any single customer above 20% of revenue is a concentration risk; above 30% is a serious one. Concentration risk shows up in business sales (buyers demand discounts), credit decisions (banks reduce credit availability), and crises (losing one customer puts the business under). Diversification is the fix: deliberately growing the customer base, accepting smaller deals, building channels that produce multiple customers.
In your business
- →Track the top 5 customers as % of revenue quarterly - watch for concentration creeping up
- →If a single customer is over 20%, deliberately diversify - don't wait until you lose them
- →Sales valuation is materially lower for concentrated books - reduce concentration 2-3 years before any exit