What to do when one client is most of your revenue

Take the money, then spend it buying independence. Use the cash to build capacity that is not attached to that client, and treat the headcount serving them as provisional until the revenue is replaced elsewhere.

What concentration actually costs

One client at sixty percent of revenue is not a client relationship. It is an employment arrangement with none of the protections, and the terms are set by someone who can change them at any point.

The costs show up before anything goes wrong. You cannot raise prices, because the downside is catastrophic. You cannot enforce scope, for the same reason. You cannot take on work that might create a conflict. Every decision is made with one party's preferences weighted far above your own. See hidden cost.

Then there is the obvious risk: a new procurement lead, a budget cut, an acquisition, and most of your revenue ends with thirty days notice.

The threshold

Above roughly thirty percent of revenue from one client, the concentration starts driving your decisions. Above fifty, the client is effectively running your business.

A buyer will apply the same test. Client concentration is one of the first things examined in a sale, and a business with one dominant account is discounted heavily or refused outright. See how to value a service business.

A worked example

A firm bills $800,000 a year, and $480,000 of it, 60 percent, comes from one client. Three of the seven staff work only on that account.

The owner keeps serving the client well and routes part of its margin into selling elsewhere: a part-time business developer, and one of the three staff moved onto new accounts. New hires for the big client go in as contractors rather than employees.

Eighteen months later the big client still pays $480,000, but total revenue is $1.2 million, so its share is down to 40 percent. If it leaves now, the firm shrinks and survives. Before, it would have closed.

What to do while it lasts

Do not refuse the revenue. Use it.

Fund the replacement. The cash from the large account pays for the business development that reduces your dependence on it.
Keep the headcount provisional. Contractors and flexible capacity for that account, so a loss does not force redundancies.
Price new work properly. Never quote a new client at the discount the large one negotiated.
Put a second person in the relationship, so it is not one contact on both sides.
Run the numbers on losing them. What survives if they leave in ninety days? That figure is your actual position, and it should be calculated before you need it. See burn rate.

Questions

What percentage of revenue from one client is too much?

Above roughly thirty percent, concentration starts shaping your decisions on pricing and scope. Above fifty percent, the client is effectively directing the business.

How do you reduce client concentration?

Use the revenue from the large account to fund business development, keep the capacity serving it flexible, and avoid extending its negotiated discount to new clients.

Why does client concentration reduce business value?

Because a buyer inherits the risk that a single account ends with short notice. Concentration is examined early in any sale and usually produces a heavy discount.

What concentration actually costs

One client at sixty percent of revenue is not a client relationship. It is an employment arrangement with none of the protections, and the terms are set by someone who can change them at any point.

Then there is the obvious risk: a new procurement lead, a budget cut, an acquisition, and most of your revenue ends with thirty days notice.

The threshold

Above roughly thirty percent of revenue from one client, the concentration starts driving your decisions. Above fifty, the client is effectively running your business.

A worked example

A firm bills $800,000 a year, and $480,000 of it, 60 percent, comes from one client. Three of the seven staff work only on that account.

What to do while it lasts

Do not refuse the revenue. Use it.

Fund the replacement. The cash from the large account pays for the business development that reduces your dependence on it.

Keep the headcount provisional. Contractors and flexible capacity for that account, so a loss does not force redundancies.

Price new work properly. Never quote a new client at the discount the large one negotiated.

Put a second person in the relationship, so it is not one contact on both sides.

Run the numbers on losing them. What survives if they leave in ninety days? That figure is your actual position, and it should be calculated before you need it. See burn rate.

Questions

What percentage of revenue from one client is too much?

Above roughly thirty percent, concentration starts shaping your decisions on pricing and scope. Above fifty percent, the client is effectively directing the business.

How do you reduce client concentration?

Use the revenue from the large account to fund business development, keep the capacity serving it flexible, and avoid extending its negotiated discount to new clients.

Why does client concentration reduce business value?

Because a buyer inherits the risk that a single account ends with short notice. Concentration is examined early in any sale and usually produces a heavy discount.