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It's very exciting when a large company wants you to be a vendor for them. Sometimes, it can mean a huge jump in revenue for your franchise, and popping the champagne is in order. In one fell swoop, your business is headed for expansion and wider exposure. It can be a boon, for sure.
But it can also bring unwelcome risk. A large customer on your list of clients almost always comes with large demands. They will expect to be treated like your #1 (and sometimes only) client. And when they grow, you will expand along with them. But it can stretch your company in ways you may not have considered.
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Risks from Large Clients
An example. We once had a large client for whom we provided executive transportation services. Their spending represented over 1/3 of our revenue. The passengers were gracious, the work was steady, their payments were consistent, and the volume was high.
Sounds great, right? The problem was that their twice-monthly payments did not coincide with our bi-weekly payroll, and we struggled with payroll every 2-3 pay periods. To cover it required borrowing against our invoices. which cost money and reduced profit.
We considered changing our pay dates, of course, but ultimately dropped the client. And our profit margin increased.
If you are trying to grow or set your company up for sale, the allure of larger revenue streams is real. But you could be damned if you take a large client and damned if you don’t. So how can a franchise survive the risks of a large client?
Diversify or Hedge your Customer Base
We know we're supposed to diversify investment portfolios to spread our risk. Customer bases should be diversified too. Market and develop other income streams to balance out your concentration.
If you do take on a large client, anything that happens to that customer, good or bad, will impact you. And so you must develop your revenue from multiple sources. No one or two customers should represent a large portion of your revenue so that your survival is not beholden to them.
To this point, we've discussed hedging your customer base. Diversifying or hedging can offset your risk from industries too.
For example, if in the lead up to an economic slowdown (like the current pandemic) your main concentration was providing printed menus to 100’s of restaurants in your city, your income slows significantly.
Hedging your customer base means offsetting your industry concentration. So, if in the given scenario you also do printing for medical supply companies and/or have a digital component to your offerings, you could find yourself with the means to stay afloat—even in an extraordinarily challenging economic time.
Get to diversification and hedging as soon as possible—maybe even before you take on a large client. Spread your risk, and find a way to enjoy the boon from a large, new customer.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.