How To Mitigate Customer Concentration Risk

Key takeaways: 

• Relying on one or two clients for most of your revenue puts your business at serious financial and operational risk. 

• You can reduce customer concentration risk by diversifying your client base, building recurring revenue, and tracking exposure regularly. 

• Using tools like CRMs and strong contracts helps you stay ahead of risks and protect your business long-term. 

Relying too much on one or two customers for most of your company’s income can put your business at risk. If a major client leaves, delays payment, or changes direction, it can disrupt your cash flow and growth plans overnight. 

This is called customer concentration risk, and it’s a common challenge for small businesses, startups, and service providers. In this guide, we’ll explain it deeper, why it matters, and how you can reduce your risk with smart, practical steps. 

What is customer concentration risk? 

Customer concentration risk happens when too much of your business’ profit depends on just one or a few customers. It’s a major risk for small businesses and startups that are still building a stable customer base because it can affect revenue if key clients stops buying. 

So, how much is too much? A few basic benchmarks can help: 

• If one customer accounts for 10% or more of your total revenue, that’s a red flag. 

• If your top three customers make up more than 50% of your income, you’re likely facing high concentration risk. 

Having one large customer might seem like a good problem to have until they leave, delay payment, or change their priorities. This can cause cash flow issues, lower your company’s value in the eyes of investors, and limit your ability to grow or sell the business down the line. 

Once you understand where the risk is, you can take steps to fix it. That starts with knowing why customer concentration happens in the first place. 

How does customer concentration happen? 

Customer concentration risk doesn’t always come from bad decisions; it often shows up naturally as your business grows. Recognizing how it happens is the first step toward fixing it. 

Natural evolution of business growth 

Many small businesses and startups land a major client early on. That big customer brings in steady work, helps keep the lights on, and may even help you grow faster. But over time, it becomes easy to rely too heavily on them. Without realizing it, most of your revenue ends up tied to one source. 

This is especially common for service-based businesses, agencies, and SaaS startups, where a single contract or license deal can dominate your income. 

Market or sales channel limitations 

It’s harder to avoid concentration in some industries because they operate in a niche market with only a few potential clients. Or maybe your sales strategy depends heavily on inbound leads, which brings in similar types of customers repeatedly. 

Customer concentration can also happen if your team doesn’t have the time or resources to consistently pursue new leads. When you’re focused on serving existing accounts, finding new ones often gets pushed aside. 

How to measure customer concentration 

You can’t reduce risk if you don’t know how much you have. Measuring customer concentration is the first step in spotting potential problems and it’s easier than you might think. 

Calculate revenue distribution 

Start by listing your top customers and how much annual revenue each one brings in. Then calculate what percentage of your total income comes from each. 

Here’s a simple formula: 

Customer Revenue ÷ Total Revenue × 100 = % of revenue from that customer 

For example, if a client brings in $200,000 and your total revenue is $1 million: 

$200,000 ÷ $1,000,000 × 100 = 20% 

That means 20% of your revenue depends on just one customer which could be risky depending on your industry. 

You can also check your top 3 or top 5 customers to get a broader view. If your top three clients account for more than 50% of total revenue, you’re likely overexposed. 

Assess concentration levels with the Herfindahl-Hirschman Index (HHI) 

While basic percentage benchmarks (like one customer = 20% of revenue) are useful, you can also use a more formal tool: the Herfindahl-Hirschman Index (HHI). This index provides a numerical score that shows how concentrated your revenue is across customers. 

How HHI works: 

1. Convert each customer’s revenue share into a percentage. 

2. Square each percentage. 

3. Add all the squared values together. 

Example: 
If you have three customers contributing 50%, 30%, and 20% of your revenue: 

• 50² = 2,500 

• 30² = 900 

• 20² = 400 
  HHI = 2,500 + 900 + 400 = 3,800 

How to interpret the score: 

• Below 1,000. Low concentration (healthy spread) 

• 1,000–2,000. Moderate concentration (watch closely) 

• Above 2,000. High concentration (take action) 

This method gives you a more nuanced view of risk especially useful if you have multiple clients with varying revenue sizes. Tools like Excel or business intelligence platforms can calculate this automatically with revenue data. 

Use risk benchmarks 

Different industries have different concentration benchmarks. For example: 

• In SaaS, having one client make up more than 15–20% of revenue might raise red flags with investors. 

• In manufacturing or wholesale, it’s not unusual to have larger clients, but anything over 30–40% from one customer can be risky without contracts or backups in place. 

You can also benchmark against your peers or use financial software that tracks this automatically. Tools like QuickBooks, HubSpot, or CRM platforms often have reporting features that help visualize customer concentration in real time. 

Why it’s risky to depend on one large client 

It might seem like a win to land a major customer who brings in steady income but putting too many eggs in one basket can backfire fast. Here’s why customer concentration can be a serious threat to your business. 

Financial risks 

When one client drives a large chunk of your revenue, any disruption like late payments, budget cuts, or cancellations can throw off your entire financial plan. It can lead to: 

• Cash flow problems, especially if you rely on their payments to cover payroll or expenses. 

• Difficulty securing loans or credit, since lenders may see your income as unstable. 

• Increased stress during slow seasons or unexpected downturns in that customer’s business. 

Operational risks 

Large customers often expect more attention, more resources, and faster turnaround times. This can create: 

• A power imbalance, where you feel pressure to say yes even when it’s not good for your business. 

• Burnout, as your team stretches to meet one client’s demands at the expense of others. 

• Limited flexibility, since you may not have capacity to take on new clients or pivot when needed. 

Strategic risks 

Customer concentration also affects your long-term plans. If you want to attract investors, raise funding, or sell your business someday, high concentration is a red flag because: 

• It can lower your company’s valuation. 

• It raises concerns during due diligence, since buyers want to know your revenue is stable, even if a major client leaves. 

• It limits your ability to grow strategically, since your success depends too much on one relationship. 

How to mitigate customer concentration risk 

If you’ve discovered your business is too reliant on a handful of clients, don’t panic—you’re not alone, and there are clear steps you can take to reduce the risk. Think of it like diversifying an investment portfolio: the goal is to spread things out so no single customer can make or break your business. 

Here are a few practical ways to start broadening your customer base: 

• Diversify your customer base 

• Develop recurring revenue models 

• Strengthen retention strategies 

• Monitor and forecast risk 

Let’s take a closer look at each one and how it can help reduce customer concentration risk: 

Diversify your customer base 

Start by expanding where and how you find customers. A few ways to do this: 

• Target new industries or verticals that might benefit from your product or service. 

• Explore new geographic regions if you’ve been focused on one market. 

• Shift your marketing from word-of-mouth to outbound efforts like business directories, SEO, or paid ads to reach new prospects. 

Develop recurring revenue models 

Predictable income makes you less dependent on big one-time deals. If you’re in SaaS or offer services, here are few ways to get other source of income: 

• Offer monthly retainers, subscriptions, or tiered service plans. 

• Package your services in a way that encourages long-term commitments rather than one-off projects. 

• Consider productizing parts of your offering like templates, reports, or training materials. 

Strengthen retention strategies 

While finding new clients is important, don’t ignore the ones you already have. A few smart moves to keep your current customers include: 

• Investing in customer success programs to make clients feel supported. 

• Offering loyalty perks, contract renewals, or multi-year deals to lock in revenue. 

• Regularly checking in with customers and gather feedback so you can fix issues before they occur. 

Monitor and forecast risk 

Make customer concentration part of your monthly or quarterly check-ins. You can: 

• Use customer relationship management (CRM) or accounting software to track revenue per client.  

• Set alerts if one customer’s share gets too high. 

• Create dashboards or reports to spot trends early and act before problems escalate. 

Technical and strategic tools 

Tackling customer concentration risk isn’t just about strategy—it’s also about using the right tools to monitor, plan, and protect your business. Here are a few that can help. 

CRM and revenue tracking 

CRM tools can show you exactly how much each client contributes to your bottom line. With the right setup, you can: 

• Track revenue by customer in real time. 

• Set alerts if a single client starts taking up too much of your income. 

• Spot gaps in your pipeline and build a more balanced sales strategy. 

Popular tools like HubSpot, Salesforce, or even simpler options like Zoho or Pipedrive offer dashboards and custom reports that make this easy to manage. 

Business insurance and legal prep 

If you rely heavily on one or two clients, it’s smart to have some legal and financial protections in place. You can: 

• Consider key-person insurance or business interruption insurance to cover losses if a major client or stakeholder relationship suddenly ends. 

• Use contracts with exit clauses or longer terms to reduce churn risk. 

• Include non-compete or termination notice periods in agreements where appropriate to give yourself time to recover. 

Legal and financial advisors can help tailor these protections to your business model and industry. 

Don’t let one customer control your future 

Customer concentration risk can quietly build up until a key client leaves or cuts back, and suddenly, your business is at risk. The smartest move is to get ahead of the problem: measure your exposure, diversify your customer base, and build more predictable revenue streams. 

Frequently asked questions