The Danger of the Golden Egg!

I have recently conducted an audit of the types of businesses I have worked with over the last 5 years to see whether there were any common factors that drove my customers to start working with me.

It has been an interesting and useful process (which I would recommend you undertake) and although reasons for engaging with a marketing consultancy can vary greatly, I did notice one strong theme which kept cropping up – an over reliance on a single customer.  As we continue to work our way through tough economic trading conditions I believe that this will continue to be a strong driving force.  It is the common “eggs in one basket” syndrome.

So many business owners chase the “golden egg” – the one big client that can launch their business into “the big time”.  There is nothing wrong with this – in fact most successful businesses will track the pivotal turning point for their business down to a specific order/client win.

However my analysis has shown that many businesses get to a point where, having secured that ultimate client, they realise that they are exposed to great risk and want to start marketing themselves in order to spread their business across a wider customer base.

This blog outlines some of the key dangers in chasing that golden egg…..

Length of pursuit

Big clients, with potential big rewards, generally take a big effort to win.  There are certainly some occasions when a major opportunity just seems to land at your feet, or a major order suddenly explodes out of minor account, but generally the conversion period for such a major client takes a long time.

It is often the case that business owners don’t take this time into account when evaluating how profitable their clients are.   Many companies go down the route of tendering for massive opportunities.

Again, this is fine but you must take into account the time and effort that goes into winning the contract – don’t get sucked in to focussing solely on chasing the huge rewards of a big tender and ignore other opportunities around you.

Profitability not turnover

Following on nicely from the “length of pursuit” and tendering for massive opportunities, it is important to analyse your client base and make sure that you know who your most profitable clients are.

In some instances it can be a real eye opener for business owners when they realise that their biggest clients are their least profitable.

It is not uncommon that some companies have had to make the tough decision to stop trading with, what on the face of it, is their biggest client (in turnover terms) and as a result have actually seen their profit levels increase.  The old business saying that ‘Turnover is vanity and Profit is vanity’ may well be overused – but it is very true.

Missing Opportunities

Businesses are faced with opportunities on a daily basis.

However in some cases, because so much effort and attention is being devoted to winning that major client, or indeed servicing that client’s needs then these opportunities pass quietly without even being noticed.

Don’t ignore the rest of your client base or disregard enquiries because you don’t have time to deal with them.  Put the mechanisms in place to ensure that this doesn’t happen.

Customer power

Avoid getting into a situation where your business is more reliant on the customer than your customer is on the reliable supply of your product or service.

If this does happen and your customer is aware of it then they may start to make unreasonable demands on your business and your margins could get squeezed.

The supermarkets are prime examples of this.  They stock so many products that the loss of a product supplier does not have a major impact on their business.

However, for that supplier the loss of an account, that guarantees the volumes of orders that the big supermarkets can make, will have a major impact on their business and so the supermarkets use this power to drive down prices and margins.

Risk Exposure

When 50% of your business (or more) is with a single client you are trading in a very precarious position.  Firstly, is the work based on a contract?

If not – it could be pulled at any time.  Many companies claim that their client’s are too reliant on them as a supplier to stop working with them.

However, unless you are actually working ‘on-site’ at the client’s premises you can never be sure what is going on behind the scenes.

If you are supplying on a non-contract basis then potentially your business could be ditched for a competitor at any time, suddenly leaving you with half the sales you previously had.

In the tough economic climate we are trading in at the moment there is even greater risk.  Massive companies have suddenly disappeared overnight and no matter how financially secure you feel your clients are – there is always that possibility.

As well as those companies who cease trading there are also those who are the subject of a takeover bid and with new owners at the helm who knows what could happen?

Whilst we are on the subject of risk due to the economic climate it is also worth noting that it could be a good time to review your business and analyse where your sales are coming from in terms of industry types.

Similar to having all your eggs in one basket with one client, if the vast majority of your business is generated from a single industry type, then again you could be exposed to similar risk.

If that industry is drastically affected by external factors then you are going to subsequently feel the knock-on effect of this.  If your business is spread more evenly across 3 or 4 different industry types, then you are naturally in a much stronger position.

So in summary, if your business relies on a single client for at least 50% of your turnover perhaps it is time to really look at how you can focus your efforts in reducing this risky position to help future-proof your business.

Firstly you could be potentially generating more business from the rest of your existing customer base and secondly, focusing efforts on winning new profitable clients. Don’t wait for the egg to start cracking!