Nathan Sykes

April 12, 2021

The Risk Of Having Big Clients

I read a lot of Jason Fried and DHH's writing, but one article I love in particular is their SvN classic, "Don't let anyone overpay you". It's part of what inspired our acquisition strategy at Howdy Interactive - we do our best to stay away from companies that have a single customer representing 2% or more of their global sales (statistically meaning we'd need at least 50 customers. Most of the companies we acquire sell items to lots of people, so it's almost never an issue).

The main reason we do this is fairly obvious - having a few large customers increases risk. We acquire companies that are super small and super simple. Training a sales team, support team, retention team, and IT team to implement solutions for a few large customers is not simple. That's what is required to maintain the level of service and innovation big clients expect, no matter if you're a software company or you make uniforms for all of their employees. If you don't have all of that in place, you might lose the client. If you lose a large client that makes up a huge portion of your revenue, you're going to feel that mark. Compare that to losing one, five, or even ten clients that just make up very small purchases, and you're able to mitigate that blow better.

What this also does, albeit accidentally, is compromise the integrity of your offer. If your priority is focusing on larger clients, their wants and needs are slowly going to take over your roadmap. They hold all of the leverage in this scenario - if you don't do what they ask, they walk and leave you with a heck of a lot less cash.

What you should be doing is adapting your offer to be able to meet the needs of lots of customers. If you're selling a product at a $79 price point and have 3,500 customers pay you that over the course of a year, that's much more lucrative to an acquisition company like ours, instead of having 25 companies paying you $10,000 per year. If just one of the 3,5000 customers leaves, you'll be out a whopping $79. But if one of the 25 customers leave your business that only sells to large clients? You're out $10k.

Even if you're not looking to sell, creating a business that focuses on obtaining lots of small customers insulates you from a lot of trouble. Trouble of building the infrastructure that has to support large clients, and trouble of impacting your revenue if they decide to leave. On the off-chance you are selling your business, awesome! Private equity firms and other acquisition companies are specifically looking for attributes like this because it minimizes risk.