By Maurie Cashman
Customer diversification is often an issue that is underestimated or misunderstood by business owners. The following survey by thoughtLEADERS, LLC indicates that this is one of the greatest risks their businesses face. But it was ranked near the bottom of the risks they are aware of.
- Lack of diversification: 14.29%
- Rapidly changing markets: 22.53%
- Access to the right talent: 31.68%
- Aggressive competition: 19.6%
- Shifts in technology: 11.9%
Last week I was fortunate enough to be featured in the EntreFest Program (page 10) with an interview discussing the benefits of purchasing an existing business vs. trying to do a startup. One of those benefits is an existing client and supplier base. However, business owners need to analyze very carefully just how diversified they really are in both their customer and supplier base. I was reminded of this in a couple of cases this week.
Letâ€™s take customer diversification as our focus to illustrate the issue. Many business owners, and their advisor team, feel that they are properly diversified if no individual customer exceeds 20% of their total sales. OK, this is a starting point, however ask yourself this: if you lost an account that was 20% of your sales, what would you have to do to your business?
One answer might be to find a customer or more likely customers to replace the loss. Challenge: Someone is already serving that customer. What kind of resources is it going to take (think sales force, reduced margins, changes in manufacturing process and tooling, customer requirements on existing equipment, etc.) to even get a shot at taking that customer away from their already-trusted supplier.
Diversify to Other Markets
A second answer may be to diversify into other markets. Challenge: How are you going to identify and serve those markets? I was General Manager of a company that manufactured livestock equipment. It was mainly focused on one type of livestock but one would think that it would fairly easily translate into other species, and it should have. But it didnâ€™t. When our segment went down we tried to move to another, with very limited success. So we decided to purchase a competitor with a market presence in that sector. Turned out that we didnâ€™t understand the nuances of the market as well as we thought and we invested many more resources than expected to try to recover and maintain market share.
You may have market dominance in a narrow market. That may mean you have no customers that are larger than 2% of your revenue. But, if the industry goes down, you are going with it. Some suppliers to Deere or Caterpillar are likely experiencing that now as suppliers to the auto makers did in the last decade. They thought they were well-diversified but they were dominant and dependent on one industry sector.
Donâ€™t Lose Key Customers In the First Place
A third answer that seems obvious, but may not be is to maintain your critical clients. Challenge: sounds simple, but it is often overlooked and taken for granted. I worked with a client that had completed significant projects for very large national clients. When analyzing their sales history at a deeper level, I found that they had not made a sale to any of their five largest customers over the last five years. When I asked why, there was no real answer. They had simply not realized that no one was calling on these clients and asking for more sales. The solution that we implemented was not only to call on the clients but to put two sales people on each of these accounts to insure that the account was not dependent on one contact.
This is not always possible. Large customers make decisions based on a variety of factors that may be beyond your control.
For example, Wal-Mart Stores Inc. is increasing the pressure on suppliers to cut the cost of their products, in an effort to regain the mantle of low-price leader and turn around its sluggish U.S. sales. The new dictate on prices is creating tension with companies that supply the hundreds of thousands of products on Wal-Martâ€™s shelves. If this happened to you would you be able to react and survive. A couple of years ago Wal-Mart called all of its greenhouse suppliers to a meeting and handed out pink slips to a large number of its suppliers right on the spot. No discussion. So long. This caused a number of bankruptcies within the industry.
Can you beat this? You bet. But it takes hard work, vigilance and a team that challenges your assumptions.