The word \u201cconcentration\u201d is usually associated with a strong ability to pay attention. Business owners are urged to concentrate when attempting to resolve the many challenges facing them. But the word has an alternate meaning in a business context as well \u2014 and a distinctly negative one at that.
\nCommon problem
\nA common problem among many companies is customer concentration. This is when a business relies on only a few customers to generate most of its revenue.
\nThe dilemma is more prevalent in some industries than others. For example, a retail business will likely market itself to a broad range of buyers and generally not face too much risk of concentration. A commercial construction company, however, may serve only a limited number of clients that build, renovate or maintain offices or facilities.
\nHow do you know whether you\u2019re at risk? One rule of thumb says that if your biggest five customers make up 25% or more of your revenue, your customer concentration is high. Another simple measure says that, if any one customer represents 10% or more of revenue, you\u2019re at risk of elevated customer concentration.
\nIn an increasingly specialized world, many types of businesses focus only on certain market segments. If yours is one of them, you may not be able to do much about customer concentration. In fact, the very strength of your company could be its knowledge and attentiveness to a limited number of buyers.
\nNonetheless, know your risk and explore strategic planning concepts that might enable you to lower it. And if diversifying your customer base just isn\u2019t an option, be sure to maintain the highest levels of customer service.
\nOther forms
\nThere are other forms of concentration. For instance, vendor concentration is when a company relies on only a handful of suppliers. If any one of them goes out of business or substantially raises its prices, the company relying on it could find itself unable to operate or, at the very least, face a severe rise in expenses.
\nYou may also encounter geographic concentration. This can take a couple forms. First, if your customer base is concentrated in one area, a dip in the regional economy or a disruptive competitor could severely affect profitability. Small local businesses are, by definition, dependent on geographic concentration. But they can still monitor the risk and look for ways to mitigate it (such as online sales).
\nSecond, there\u2019s geographic concentration in the global sense. Say your company relies on a foreign supplier for iron, steel or another essential component. Tariffs can have an enormous impact on cost and availability. Geopolitical and environmental factors might also come into play.
\nMajor risk
\nYes, concentration is a good thing when it comes to mental acuity. But the other kind of concentration is a risk factor to learn about and address as the year rolls along. We can assist you in measuring your susceptibility and developing strategies for moderating it.
\n\u00a9 2020<\/p>\n","protected":false},"excerpt":{"rendered":"
The word \u201cconcentration\u201d is usually associated with a strong ability to pay attention. Business owners are urged to concentrate when attempting to resolve the many challenges facing them. But the word has an alternate meaning in a business context as well \u2014 and a distinctly negative one at that. Common problem A common problem among […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[],"class_list":["post-14394","post","type-post","status-publish","format-standard","hentry","category-business"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14394","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=14394"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14394\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=14394"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=14394"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=14394"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}