The Pros and Cons of having a few Big Customers
Working in the B2B field, most businesses try to find as many customers as possible, from small businesses to medium and large businesses. However, some companies only focus on finding and developing relationships with large customers. So what are the pros and cons of that?
Not all customers are created equally. Particularly in B2B sectors, many firms have a few vital customers that provide a disproportionate share of revenue and sale teams focus on those accounts. There can be advantaged to having a handful of VIP clients: the approach is efficient ( it requires a smaller sales force and less prospecting than others); the steady stream of repeat orders can stabilize cash flow, and the reliance demonstrated by a key account is a convincing testimonial. But depending on just a few accounts can also be risky ( what happens if one defects ?), and the large buyer might use their status to negotiate better prices, hurting profitability.
A new study looks at how all this plays out for young companies. Researchers examined the financial record of 1.023 firms that went public from 2000 to 2011. They identified how reliant each was on major customers and examined each firm’s technological abilities( measured by patents filed), operational capabilities( measured by headcount and plant investment, among other things), and profitability, along with the creditworthiness of major customers. Then they looked at each firm’s IPO and firm performance several years later.
Companies whose sales were highly concentrated among a few customers had higher market capitalization than other companies did, and their stock performed better than their counterparts on the first trading day after the IPO. “ IPO investors are primarily concerned about the survival of the firm, and they value signals that reduce the risk associated with the firm’s prospects”, the researchers write. ‘’ In such a context, having a steady stream of revenue that is associated with high concentration reduced investor’s uncertainty’’. But further down the road, companies with concentrated sales saw profits drop. Firms with marketing, technological, or operational prowess and those whose big customers were highly creditworthy were less affected than others. The researchers say that managers should be aware of the long-term cost of focusing too much effort on too few customers and seek to expand the customer base as their firm grows.