Customers, like investment and manure, need to be spread evenly. The risk in not doing that is dangerous dependency. Big customers are just part of that mix.
In tough times, many companies double down and focus on a few big customers. For resellers, that could mean government contracts and jobs with corporations. This is lucrative territory but relying on it too much can be a dangerous strategy. That's particularly true in a dicey economy where customers coming out of the downturn are being more choosy about who they run with.
If the largest customer account represents more than 30 percent of the company's turnover, the loss of that customer or a slow payment can put a big dent in the revenue of the business. Some experts say that ideally, no single account should represent more than 25 percent of revenue; some companies say that's too much, insisting the figure should be no more than 10 percent. In that sense, it is very much like an investment portfolio where the stocks should cover a broad range of industries and should be sufficiently diversified to deal with the ups and downs.
Still, big customers are important. Entrepreneurs often using hunting terms to describe them: getting the elephant, catching the big fish. Big clients mean big connections and bigger payments.
But big clients might also have special demands. That might require more resources and people, like account managers.
And being dependent on a big customer can also place the entrepreneur in a vulnerable position if the customer is slow paying. Indeed, US credit bureau Experian released research earlier this year showing that larger companies take longer to pay.
Companies with more than 1000 employees were more likely to be more than 90 days late on a payment than other sized businesses. Big companies and organizations were behind on 23 percent of dollars owed. This was higher than any other category.
Why do they do this? Because they can. It's not going to hurt them and a slow payment cycle is likely to be part of a more sophisticated cash flow management system. If corporations can manage their inventory well, collect on their bills faster and take a longer time to pay their creditors, it means they rely less on borrowings and it frees up cash.
This is where it is important to have a good working relationship because it often comes down to bare-knuckle negotiations between companies, their customers and suppliers. It's a balancing act and the reseller needs to remind the big customer that untenable terms could risk putting them out of business, which could end up disrupting the customer's operations.
It means explaining to the big customer that this is a critical issue and it is having an impact on your business. Specialists say you do not have to get too specific as they will get the drift. The important part is establishing a dialogue where the reseller can make their point clear and put their foot down.
This is different from small businesses that pay late. When that happens, it's often a sign they have cash flow issues. Large organisations, on the other hand, have the leverage to pay slowly and they can afford to do it with no consequences. Between the two, it's a completely different kind of negotiation.
Another potential problem with dependency is the possibility that the reseller might ignore its existing customer base to focus on the big fish. That would be a big mistake. A better strategy would be to throw in resources to look after the big customer but work hard to build even closer relationships with the smaller ones who were there from the start. The helps create a more diverse customer base.
Relying on big customers too much can leave a business vulnerable. The problem is no one can afford to turn down a big account. So how does a reseller reap the rewards of big accounts without putting everything at risk?Watertight agreements would need to be in place. However, that is not always the case. Smaller SMEs might not be in a position to demand them.
Resellers with the resources or access to funding might also look at appointing account managers to focus on business development and sales for the big customer. That also keeps the reseller focused and ensures no one gets lulled into a false sense of security.
Of course, not every company is in a position to diversify their customer base. One possible solution is to be as flexible as possible so that the business can scale up and down quickly. That can mean hiring contractors to handle big jobs or setting up satellite offices to handle the large contract.
The most important part is to manage the relationship. That means figuring out the big drivers of the big client's business and making sure to provide some value in those areas. The reseller with a big customer needs to be across that customer's crunch issues including costs and competition.
In the end, it's about developing a partnership. That is the best kind of customer relationship.
Next: Case study
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Issue: 334 | December 2014
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