Big customers carry risks and rewards alike
Every freight sales rep wakes up in the morning hoping today’s the day they close that massive deal — the one that’ll double the fleet size and their commission cheques all at once.
But sometimes you have to be careful what you wish for. Big accounts can lead to customer concentrations that put your company at risk.
In the simplest terms, customer concentration is the measure of how your total revenue is distributed among your customers.
The accepted thinking is that if any single customer makes up 10% of your total revenue, or any five customers make up 25% of the total, your fleet has too many eggs in one basket.
Unfortunately, trucking is one of those industries where companies tend to have high levels of customer concentration. It’s hard to avoid, especially at smaller fleets.
Trust me, I’ve been there. I know how hard it is to say “no” when your biggest customer keeps offering up more business. At MSM, five customers produced almost 40% of our revenue. It caused a lot of sleepless nights.
Frankly, I’m not convinced it was as big a problem as we made it out to be. Over time I realized that customer concentration is only a problem if you don’t manage the risk. Elon Musk says it best: “It’s OK to have all your eggs in one basket as long as you control what happens in the basket.”
Here are my thoughts on customer concentration in trucking, and how to keep your eggs from getting scrambled.
Good and bad
The good news about customer concentration is that you probably have deep long-term relationships with your clients, which is something every company wants. With fewer customers, your team can provide a higher level of service and develop in-depth knowledge that your customers won’t find anywhere else.
On the other hand, a big customer has leverage when negotiating pricing, threatening your bottom line. They know you have too much to lose to walk away from the table.
One of the biggest problems comes when it’s time to sell the business.
Dependence on a few customers is perceived negatively by buyers, and often leads to a reduced sales price. It can also add to the length of your earn-out and the amount of time you’re forced to hang around as an employee.
Few entrepreneurs or sales reps are wired to say “no” to more business from an existing customer. Fortunately, they don’t have to — as long as they know how to manage the risk. This was our playbook at MSM:
- Develop deep personal relationships with the right people at multiple levels of the organization, including the C-suite. Don’t let the business be tied to one person.
- Give your contracts teeth with serious penalties for breaking them. If the customer won’t sign on the dotted line, or won’t share the risk, it’s a sure sign of trouble down the road.
- Diversify and increase the customer base. The simplest way to reduce the risk of customer concentration is to expand your revenue sources.
There are a few things I would suggest today that I wasn’t smart enough to do 10 years ago.
Consider an acquisition. It can instantly change your customer mix and reduce your reliance on a few big accounts. Invest in digital marketing to generate more leads and increase the base of smaller customers. Train the team in the “cone of silence.” The customer doesn’t have to know how important they are to your company’s survival.
Finally, know what it costs to service each customer. When we lost one of our biggest accounts at MSM, I was devastated until the dust settled and we tallied up all the resources we had dedicated to them.
Sometimes that big egg isn’t all it’s cracked up to be.
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