Is One Big Customer All You Need?

By Rieva Lesonsky

For years, the conventional wisdom in the small business world has held that it’s risky to rely on one key customer. As soon as possible, the thinking goes, your company needs to diversify into multiple customer accounts so that if one customer goes under, is slow to pay or otherwise “flakes out” on you, you’ve got other sources of cash flow.

Now, new research suggests this commonly accepted advice might be wrong…or at least, might need some adjusting. The Wall Street Journal reports on a six-year study conducted by Helena Yli-Renko, an assistant professor of entrepreneurship at the University of Southern California’s Lloyd Greif Center for Entrepreneurial Studies, and Ramkumar Janakiraman, an assistant professor of marketing at the Mays Business School at Texas A&M University.

The study followed 180 startup technology companies for a six-year period. Out of those that were still in business at the study’s end, those that had relied on one big customer during the startup phase were more likely to have more customers (48 customers, on average, compared to an average of just 12 customers for the companies that had been more diversified in the beginning).

Although these results might seem surprising, the authors theorize one reason for the growth is that when a business is just starting out, it’s simpler and costs less to keep up relationships with a few customers than with lots of customers. As a result, the companies that relied on fewer customers were able to keep the cost of sales low.

The study isn’t totally conclusive, however, because some of the companies that relied on a dominant customer didn’t survive. What made the difference? The experience level of the management team was a key factor, the authors believe. The companies with more experienced management were better able to add new customers instead of continuing to rely on just a few accounts.

While I see some relevance in these arguments, I have to say I take them with a grain of salt—probably due to personal experience. When my business was just starting out, we relied on one key customer that had a long track record of success. Unfortunately, the recession hit and, within months of our launch, our key customer was on the rocks. Eventually, it went bankrupt. If we hadn’t been fortunate enough to find other customers, we would have been in big trouble.

When it comes to growing—or even surviving—by relying on one key customer, I’d say luck is as much a factor as anything else. And betting your business on luck isn’t a smart move in today’s uncertain world.

Image by Flickr user Arran Edmonstone (Creative Commons)

This entry was posted on Monday, September 12th, 2011 at 6:00 am and is filed under Business Development, Sales Process, sales process, Small Business, small business. You can follow any responses to this entry through the RSS 2.0 feed.


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