News
June 25, 2024
Solving the Single Customer Dilemma
At Bridge Business Credit, we work with many manufacturing industry clients who find themselves in the sometimes-dicey situation of serving a single customer.
This dilemma occurs regularly in segments like the automotive industry when a small- to medium size- manufacturer is starting out with only a single OEM to supply component parts.
Such a situation can lead to an important task for our company – to identify a risk of overexposure to customers who may suffer adversity that could directly harm the profitability of the supplier company.
This risk of concentrating all efforts on a single customer focuses on the dangers associated with relying on a small number of large customers for a significant percentage of your company’s revenue. Such high dependency on a single customer can have multiple meanings and will vary for each business.
Here are some of the main risks of having only one customer:
1. The only customer stops paying.
A common risk with a single customer is that the big customer you rely on for most of your income stops paying. Businesses lose customers all the time for several reasons – it’s common, and businesses can usually bounce back.
However, if you lose this important customer you trusted, your business will lose all the revenue associated with that customer, possibly leading to your company losing a significant amount of money that could impact how your business continues to operate.
2. Changing products on behalf of your customer.
When customers have such a substantial influence on your income, it’s natural to want to do everything in your power to please them. However, this can quickly turn into a trap. It is common for large customers to request changes to your products or demand that you customize something for them.
Although this is normal, since these can be initiatives that are usually decided by companies, you can quickly get caught up in a cycle of changing plans on behalf of your customer. Once you make changes based on a customer’s product plan, it’s hard to find your way back to what you originally envisioned.
3. Only one customer leads to uneven bargaining power.
Large customers have a certain amount of power over a company due to the amount of money they can pay or take from you. When you give customers this kind of power, they tend to take advantage of it. They may try to pressure your business into lower prices or make other exceptions on their behalf that will result in your business losing money.
4. The concentration of customers affects the value of your business.
An often-overlooked risk is how having a single customer can affect the value of your business. Potential buyers and investors can view this loyalty to a single customer negatively. As such, buyers are likely to be affected by the compelling challenge of sustained spending at your business.
Are there ways to reduce dependency on a single customer?
Being aware of the risks of having a single customer is the first step to avoiding them in your company. The best way to do this is to vary the size and number of customers. Having several smaller, more diverse customer segments is more beneficial than having just one or two large ones.
A Harvard Business Review report offers three ways to minimize risk in a single customer situation:
1. Spread your risk and anchor it. Be careful not to be dependent on a single customer. Too much dependency provides little room for a business to move strategically, with the risk of being squeezed on price, product mix, and trading terms.
2. Know your customers’ pressure points. Communicate upfront what you want from the customer – prompt payment, reasonable lead times, and clear specifications on what is required. Conversely, make sure you clearly understand the customers’ expectations. Both can play the same game.
3. Decrease your net dependence. The key to a healthy customer-supplier relationship is to balance power between the two parties. This is especially important in a business relationship that is symbiotic, rife with multiple co-dependencies.
Single customer dependency is common but does not have to become a major challenge. Manufacturers who find themselves financially stretched due to single customer issues or a host of other reasons can look to Bridge Business Credit for expert assistance with asset-based financing solutions to support your business. Contact us to learn more.