What Is Customer Concentration Risk?

Name: Quality Business Plan by Dr. Paul Borosky
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The Definition

What Exactly Is Customer Concentration?

Short Answer

Customer concentration is the share of a business’s sales, or profit, that comes from its largest customers. The higher the share, the more power those customers have over price and payment terms, and the bigger the hit if they leave. Many owners set a cap on how much any single customer can be.

Concentration = one customer’s sales ÷ total sales

Doctor Owl, in Plain English

“When half your honey goes to one customer, half your terms are his to set. Decide how big any one buyer may be before he decides for you.”

How This Guide Works

Need the answer fast? Read the Short Answer above and the numbered steps. Want the full picture? Follow Beatrix, a bee who makes honey and candles from Dr. Paul’s Fabled Forest Business School Series, as one buyer quietly grows to half of everything she sells. Her story shows up in a few short gold notes along the way. The math sits in one section, clearly marked.

Is One Customer Too Big a Share of Your Sales?

Have Dr. Paul show concentration the way a lender reads it, work out a cap with him, or learn the measure first.

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From Dr. Paul’s Fabled Forest

Meet Beatrix Again: Half the Cases Say W

Some lessons stick better as a story. Dr. Paul’s Fabled Forest Business School Series teaches business through a forest full of small business owners. Doctor Owl, a dry-witted consultant who lives in the Lone Oak, helps them fix the same problems real owners face.

Today he visits Beatrix the Bee, the honey maker who once turned a whale’s offer for every jar into a deal for ten cases. Since then the order has crept up a little at a time. Now half her cases are chalked with a W for the whale, and a new letter has just arrived with next season’s terms.

Why It Matters

Why Is It Risky When One Customer Is Most of Your Sales?

A big account feels like security. It is steady, it is easy, and it fills the calendar. But the bigger its share, the more it controls your price, your payment timing, and your schedule.

Concentration usually grows by accident. You give the big customer a little more each month because the order is easy to fill, and your smaller customers get squeezed out. Then the big one changes terms, and you have nowhere else to sell. Lenders see it too, which is why customer concentration shows up in underwriting.

In the Fabled Forest

Beatrix’s whale sent new terms for June: 16 coins a case instead of 18, paid in 120 days instead of 90. With half her honey going to him, her month dropped from 240 coins kept to 190.

How to Measure It

How Do You Calculate Customer Concentration?

List customers by sales. Take the last twelve months and rank customers from largest to smallest.
Find each one’s share. Divide each customer’s sales by your total sales.
Check profit, not just sales. A big account at a low price may be a much smaller share of your profit than of your sales.
Note the terms. Payment days and price per unit for each of the top customers.

In the Fabled Forest

One night Beatrix listed every customer she had: the stall, the dock store, the waffle café, and the rest, with what each one paid and when. Only then did she see it. She had given half the honey to the customer who paid the least and the latest.

The Fix

What Is a Safe Share for Your Biggest Customer?

Many owners and lenders get uneasy when one customer passes about 20 to 30 percent of sales. The right cap depends on your business, but the act of choosing one matters more than the exact number.

You do not have to drop the big customer. Cap the share, offer that amount on your terms, and give the freed-up supply to customers who pay more or faster. Then keep adding small customers so the cap stays easy to hold.

In the Fabled Forest

Beatrix did not stop selling to the whale. She decided nobody gets more than a third, and wrote to offer sixteen cases a month at her old price and terms. Her month came back to 338 coins kept, with the stall and the shops supplied first.

The Numbers

How Much Did One Customer Cost Her?

This is the math section. Skip it if you only want the steps.

Here is Beatrix’s 50-case month at the old terms and at the whale’s new ones.

Of 50 cases	Kept at 18 a case	Kept at 16, paid in 120 days
Whale: 25 cases	75	25
Shops: 21 cases	105	105
Stall: 4 cases	60	60
Total kept a month	240	190

Step 1: His share. 25 of 50 cases = 50 percent of her volume.

Step 2: The cost of one letter. A 2-coin price cut on 25 cases = 50 coins a month gone, about 21 percent of her monthly profit, plus a month longer to get paid.

Step 3: Your version. Your largest customer’s sales ÷ total sales. Then ask: if they cut price 10 percent or left, what happens to your month?

Illustrative numbers in forest coins, from the book. Use your own twelve months of sales.

Step by Step

How Do You Reduce Customer Concentration?

Four steps you can start this month.

Rank your customers by sales and profit.
Use twelve months of data. Mark anyone above 20 percent.
Pick a cap.
Choose the most any single customer may be. Write it down.
Offer the big customer that share, on your terms.
Put volume, price, and payment days in writing. You are not cutting them off. You are sizing them.
Feed the rest of the business.
Give the freed supply to customers who pay more or faster, and add new small accounts every month.

In the Fabled Forest

Doctor Owl’s scroll listed every customer with a space at the bottom for a cap. Beatrix wrote: a third. Then her helper rubbed the W off nine cases.

Beatrix’s Full Story

What Did the Whale Say to a Cap?

This page gives you the short version. The book gives you the whole spring: the chalked cases, the letter with the new terms, the two Sundays Beatrix worked to catch up, the list she made alone at night, and the short letter that set the cap.

Every chapter of Growth for Small Businesses works the same way. One owner, one problem, one real idea you can use on Monday, plus a one-page worksheet to do it.

A Business Plan Writer’s View

How Do Lenders Read Customer Concentration in a Business Plan?

Dr. Paul Borosky, DBA, MBA · Business Plan Writer

Lenders reading a business plan look for concentration the same way they look for debt. If one customer is a large share of revenue, they want to know the contract terms, how long the relationship has lasted, and what the business looks like without it. Dr. Paul addresses it directly in the plan: the customer list by share, the terms of the big account, and the plan to diversify, with dates. Hiding a big customer never works, because it shows up in the bank statements. Naming it, capping it, and showing the next ten customers turns a red flag into a sign of a disciplined owner.