I’ve often spoken about the need and importance of diversification when it comes to your investment portfolio. However, does the same thing that’s said about your investments also hold true for your customers?
A large mistake that entrepreneurs make far too frequently is having client concentration risk. Similar to a concentrated investment portfolio, much of their business is dependent on a small concentration of customers, or even one customer, for the profitability of their business.
While having a big customer that brings in enormous profits is wonderful, it’s akin to relying on one stock investment. We all know that you shouldn’t put all your eggs in one basket when it comes to stock choices, and the same should apply to your customer base. Unfortunately, no matter how good a customer is, there’s still risk present. Everything from a cheaper competitor to financial issues could ultimately sever this relationship and present a huge problem for your business.
How can entrepreneurs avoid this mistake?
If you haven’t done this already, client concentration risk is a metric you should absolutely include in your business plan going forward. Rather than just solely focusing on increased profits, entrepreneurs would be better served by also focusing on growing a diverse client base.
Of course, every business is different, so there isn’t a one-size-fits-all formula for having a diverse client base. In general, you want an ideal customer base where a customer leaving doesn’t present a huge problem for your company. Ideally, you want customers in a wide variety of different industries and spectrums and to be as diversified as possible, but any amount of diversification is beneficial.
Want to learn more?
At LexION Capital, we aid many entrepreneurs when it comes to avoiding financial mistakes. If you’re interested in learning more about our services or think they’d be good fit for you, don’t hesitate to contact us today.
