What your largest customer can teach you about your business.

Is your largest customer too large? 

If you are leading and growing a company with an eye towards increasing your valuation, the worst thing you can do is put too many eggs in a single business basket.

‍Too much dependency on a dominant customer will lower your valuation — end of story.

‍Any valuation growth strategy should involve customer diversification, now and in the future.

A large customer can bring a lot of value to your business, even beyond the revenue and — hopefully — profit that comes with it. Having a large, recognizable customer lends market credibility to your business. Those credibility blocks on your website are a way for you to say, “See? We’ve got what it takes; you can trust us because these guys already do.” 

Having other large customers who already rely upon you gives a prospect more confidence in your capabilities and lowers their perceived risk of partnering with you to help them in their business. It also shows potential buyers of your business that you have what it takes to play with the “big boys.” 

These are the obvious benefits to having big customers. But there can be disadvantages too. 

When Big is Too Big 

I once served on the board of a company that had a long, productive relationship with a large customer. The relationship had served them well and given them many advantages over the years: they enjoyed the benefits of increased revenue that eclipsed all their other customers. They had significantly grown their business over the years because of this exact relationship. It allowed them to expand operations, put in new equipment, and serve new customer’s needs because of the capabilities they had acquired. 

Things were going great — until their largest customer faced internal cost pressures of their own and started to drive down the price they were willing to pay for the company’s services. The relationship became less and less profitable, and with no leverage of their own, the company became more and more frustrated by their customer’s demands. 

The problem was they had grown highly dependent on that customer for much of their business. They had a decision to make: they could continue to get wrung out on price until they were unable to stay afloat. Or they could end a long-term relationship that was becoming increasingly unprofitable. 

The executive team agonized over this, and as they debated the pros and cons of letting go of their biggest customer, they began to understand just how beholden to that customer they had become. Over the years they had accommodated this customer’s need, often to their own detriment. They had unwittingly become a captive supplier, less and less in control of their own destiny. 

Ultimately, they made the decision to terminate the relationship. A hard, courageous decision that had its fair share of second doubts. 

But it was the correct one. 

While this company suffered from their business break-up in the short term, they were able to replace that business with more ideal clients. This became a forcing function to reaffirm their mission and develop a strategy to better pursue it. 

In order to set your business up for growth and success in both the near and distant future, you have to be willing to take a deep look at how your largest customers are affecting your business. 

Take a Deep Look

Think about your largest customer or customers. What have they made possible for your business? And how might they be holding you back? How have their demands affected your products, your processes, and your priorities? 

What compromises might you be making for your largest customers? 

Ask your team to consider that question in one of your staff meetings. Or better, ask them to articulate, in writing, the specific benefits of working with that largest customer, along with the ways in which they may be a hindrance to your mission or to your ability to deliver your best to your other — perhaps more ideal — clients.

Assess Your Largest Customer & the Value it Brings to Your Business

As you begin to assess your largest customer and the net gain you experience in working with them, here’s a few questions you and your team might consider. 

Remember: this likely isn’t a single meeting where a decision is pronounced once and for all. You will need to assess and reassess your largest customer as markets surge and wane, and as your own business needs evolve and change. But an initial assessment is vital to make sure you aren’t hindering your own valuation by becoming beholden to a single large customer. 

First, consider the positive influences on your company:

• What positive changes has this customer made to the way we deliver our value to other customers?
• What positive changes has this customer made to how we improved our processes and profitability?
• What positive changes has this customer made to the vitality and development of our people?
• What positive changes has this customer had on our ability to serve the market we are targeting?
• In what other ways has this customer advanced the mission of our business?

Now, evaluate the flip-side: 

• In what ways does serving this customer hinder our ability to serve smaller, but ideal, customers?
• In what ways have we become unnecessarily less flexible and agile to the needs of our other customers?
• In what ways might this customer be unreasonably overly taxing our people and distracting them from a more important endeavor?
• In what ways does this customer hinder our ability to better serve our most important market?
• In what other ways might we have unknowingly and unnecessarily compromised our mission to serve this customer?
• Do we have a pivot for our company in place should our work with this customer ever cease unexpectedly? 

Ultimately, you need to decide if the growth strategy of your own business is getting lost in the wake of serving this large customer. Do you fear losing their revenue enough that it causes you to sacrifice your own vision to meet their demands? 

These are not always easy questions to answer. But taking a deep look and working to understand both the positive contributions your largest customers are making to your business, as well as the potentially unhelpful accommodations you made to keep them is a critical consideration. 

Every leader needs to maintain a discipline toward the mission of the organization they lead. That’s their job — a job that’s made a lot easier by the cachet and cash a large company brings. Maintaining the balance between benefiting from that large customer and sacrificing your business on the altar of serving that large customer is key in maintaining a growth strategy that isn’t dependent on things outside of your control. 

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‍This article is adapted from a post by the author that appeared on the Strategic CEO Substack.
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