Chasing big clients might seem like a good idea, but being dependent on a particular company or industry can leave your business exposed if things go wrong.
Your small business needs more than a handful of clients. Having a short customer list leaves you in a precarious position, depending on your customers’ own success and that of their market.
It’s worth doing the sums to understand how much damage could be done to your business if you lose one customer, and how much each client is worth to you, says Ian Smallwood, head of business services at the Let’s Do Business Group. “If one of your biggest customers went under, what would be the impact on your cash flow? Or even if they took a month or two longer to pay? Would it be fatal or just a bad cold? Could you realistically trade through it?”
Can the machinery that you already have produce something new that will extend your reach into an existing market?
– Ian Smallwood, Let’s Do Business Group
Peter Searle, SME consultant at Business Doctors, agrees. “As a rule of thumb, one client should not represent more than 15pc of your revenue to ensure the business is resilient. Clients can disappear for all sorts of reasons, including going bust and personnel changes, as well as external factors.”
Risk may not only come from a single customer hitting a rough patch, but from a shared industry. “If your top three customers were all in house building, for example, and there was a significant slowdown or downturn in that industry, the likelihood is that they would all reduce or stop orders at the same time,” Mr Smallwood says.
Plus, depending too heavily on a single customer will affect your relationship, says John Buchanan, business performance consultant at chartered accountants HW Fisher and Company. “They will have significant power over your business – from the prices you charge to the quality of the products and the services you offer,” he warns.
It’s not all just about risk. A wider customer base could make your business more valuable if you’re looking to sell it someday. “Diversifying beyond a few clients is one of the eight factors that increases the value of a business when it is sold,” says Mr Searle.
Expanding into a new market, either with existing products and services or with new ones, is the main way to diversify. “Do your market research to see if there’s an opportunity to sell your existing products and services to a new market,” says Mr Buchanan. “If this isn’t the case, you might have to think about diversifying your product range, but this can be a time-consuming process and brings its own set of risks.”
Mr Smallwood suggests looking for new markets for existing services and products, potentially by looking at your rivals to see where else they operate, whether a different industry or geographical market.
Developing new products is an easy way to expand your customer base, but if you’re only selling different products to existing customers, that won’t cut risk, says to Mr Smallwood. Instead, he advises cutting costs and risk by working with the equipment or skills you already have. “Can the machinery that you already have produce something new that will extend your reach into an existing market or sell into a new market?”
Where should you start looking for a new market? Mr Smallwood advises SMEs to consider it in the same manner as crossing the road and looking both ways. “Don’t just look east, towards China, Thailand and so on. There’s huge potential in looking towards the sunset. Not just North America, but the Caribbean, and many of the South American countries, really value Great British products,” he says.
Positioning yourself as a ‘specialist’ carries a degree of credibility among certain markets and industries
Richard Heggie, head of high growth and entrepreneurs at Barclays, believes Brexithas presented a “new opportunity” for British businesses to look further overseas for trade. “The ‘Made in Britain’ brand is highly attractive to overseas audiences and attracts a premium,” he adds. “When targeting overseas audiences, businesses should consider tailoring how they are selling their product or service, for example through delivering country-specific marketing campaigns.”
Research by Barclays has shown that it’s not only British-made products that are held in high regard, but also British entrepreneurs, who are seen as “reliable, smart and polite”.
While diversifying your client base will reduce risk and may boost revenue, there will be costs, including marketing and hiring new staff. Mr Smallwood advises looking into Research and Development Tax Credits if you’re developing a new product and to turn to your local Growth Hub or the Department of International Trade for advice.
Smaller companies may not wish to invest in expensive in-house sales or marketing staff, notes James Rix, founder of recruitment firm StreetPR. But there are alternatives. “Face-to-face marketing – whether it’s on the street, in transport hubs, in shopping centres or at festivals, sporting and public events – can be incredibly effective at gaining trial and awareness without having to allocate huge amounts to the marketing budget,” he adds. “Using temporary sales and marketing staff also provides companies with flexibility, which is particularly useful for small companies.”
Consider the nature of your business before diversifying, as some businesses do benefit from having a sharp focus or owning a particular niche. “Positioning yourself as a ‘specialist’ carries a degree of credibility among certain markets and industries,” says Simon Littlewood, head of business growth services at Grant Thornton UK. Plus, he adds, it lets SMEs develop strong relationships with their customers, “getting under the skin of the business” in order to better tailor their products and services.
In the end, the right number of customers and the best route to client diversity depends on your own business. Mr Smallwood explains: “There’s no one perfect way to diversify, because every business is just as individual and different as its owners, staff and customers.”
- How do you manage your SME’s client list? Email [email protected]