I read an article published on news.com.au in the past week discussing a David vs Goliath battle of a small cleaning company having its contracts terminated by McDonalds and it was a classic lesson on the risks of relying on one big customer.
Unfortunately the gentlemen at the forefront of this event is left with nothing and his company is in liquidation. So what lesson’s can we take from this?
In evaluating the risk of a business, there is a framework commonly used called the Porters Five Forces. One of these forces is: The Bargaining Power of Customers. What that means is, how much influence do your customers have over you? Let’s say you only have one big customer, they would have a lot of power over you because if they want to pay you late you don’t have much choice, if they want to drill you on price you have to comply and if they want to stop working with you then you can easily be out of business.
Businesses that rely on one big customer are exposing themselves to a tremendous amount of risk however the temptation can be strong when you are working hard to grow your business and a big customer is giving you an opportunity to work for them, thus solving your marketing and cashflow problems. Also, it easy working for one customer, you don’t have a lot of admin and need for CRMs and multiple relationships etc. so the facade of “I’ve got it made” can be short lived if the customer change their minds. Even worse if you’ve accrued tax debt, a team of staff and owe bank loans and you’re left holding the bill.
I have seen so many businesses that rely on a big customer get hurt when the terms of the relationship change. So what do you do?
The first step is to recognise if you are already in this situation or whether engaging that next client will put you there. Maybe you need to review your strategy and business model. If you wish to continue working like this, you must understand the risks and put measures in place where possible.
An alternative is to still work with larger customers but have a number of smaller clients. This will spread the risk. If you lose the big customer, you still have a number of smaller clients. If one or two smaller clients go, you still have the big customer and the rest of the smaller customers.
Don’t become to content and reliant on a big client because it might be happy days today and then tomorrow they turn around and give you the flick.
You can read the original article on news.com.au here.