This article are provided for information purposes only, and are not intended as legal advice.


Economic dependence on a customer – is this a good thing for a business?

January 4th, 2010

When you start your business, you may only have one customer.  As time goes on, hopefully you get more customers.  What happens if that customer grows and grows and keeps giving you more work and now your revenue is in excess of $1 million with that customer.  Do you continue to look for more business but if you are now working 24/7, you do not have any more time for new customers.  If you do nothing, you are vulnerable. 

 

Having a large customer can be very profitable but if most or all of your business is with only one customer, you are very vulnerable.  I know of a case where a person started a side business 10 years ago and now it has grown into a very profitable full time business.  Almost all of the business comes from one customer.  As time has gone by, the customer thought that they were paying the subcontractor too much money and that they wanted to participate in the profits and keep more of the money themselves.  They tried to do the work in prior years but never could get good staff, they had high turnover, poor supervisors, that is why they outsourced the work.  But as the economy has affected many businesses, businesses are looking at ways to improve their bottom line.  In this case, they wanted to participate in the profits because they realized that the subcontractor was buying lots of assets therefore he must be very profitable. Since the subcontractor did not believe that they would bring the work in house, he refused to change the way he did business.

 

Then one day, the customer decided that they were going to bring 100% of the business in house and no longer use subcontractors.  This business with 35 employees no longer had any revenue.  The subcontractor is responsible for severance of the employees.  One minute, the business was worth a considerable amount, the next minute, it was worthless.

 

Too many eggs in one basket is not healthy.  Typically, many firms enjoy an 80/20 rule, 80% of the profits are generated from 20% of the customers.  Once you all your profits from one or two customers, you are very vulnerable to changes in management or ownership of the customer.  Did buying expensive assets that the customer could see realize that your business is very profitable and maybe that if they changed and brought back the work in house, their profits would increase?  If the subcontractor had invested the money or bought a business and not bought physical personal assets such as cars, cottages, investment properties and took long holidays, would the customer have noticed that they may have been overpaying for the work?


Filed under: Business strategies — Gary Landa @ 11:35 am


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