When analyzing sales, what are some good ratios and/or rules of thumb when looking at customer concentation? For example: "Top 3 customers make up X% of sales", "Top 25% of customers make up Y% of sales", etc.
What are some important ratios to look at when analyzing customer concentration?
Answers
I think the answer will also depend on the industry. However we look at retention (but we are in the wireless industry, so Churn is huge for us). In the construction industry we look at Profitability by job (customer), GP by customer and as you mention top (3) five customers as a % of income.
We segment data by users (function; finance,
In addition to the comments above, from a credit perspective, might be useful to assess revenues as % of total revenues, revenues by region or net worth.
Ideally you view this via the lens of your strategic growth plan - i.e. what types of customers you'd like at different stages in a product or business life cycle. A higher concentration of a certain type may be acceptable if there's a market adjacency/ascension model reason for having those customers.
Of course the other way to view this is through a preservation lens - if a customer type was lost for any reason (competitive, economic, tech change, etc) how much of our profits (margin and actual $ contribution) would be wiped out? An extremely oversimplified way of viewing this might be based on profit margin: 10% net margin means that a customer type should not represent more than 10% of your customer base.
I like Per's position of looking at the impact of lost clients, I would tag on a few steps to look at the impact to cash. You can look at the different slices of the business to see if a particular cut of clients has a bigger impact. The loss of cash can inflict pain on long-term growth, etc.
First, look at just their recurring revenue to your firm (eliminate one-time or pass through costs that flow through revenue).
Second, look at the supporting cost structure to see how much this will change with a loss of a given group of customers. In a high leverage business, say a SaaS model or one with relatively fixed capital, the impact to the bottom line can be pretty serious since the cost is less flexible.
Third, how long would it take to replace that revenue and margin? Again, the sales cycle may vary by customer group.
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An interesting view that we did is segment our clients by ease/likelihood of replacing our product. For example, small businesses were earlier adopters of SaaS models.
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Great question and great answers
Mark
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