Client concentration puts your agency at risk

You’re at risk if you get more than 20% of your agency’s business from a single client. Here’s how to fix the problem.

Are you getting more than 20% of your agency’s business from a single client? You’ve got a Client Concentration problem.

You’re putting your agency’s future at risk:

  1. If the huge client fires your agency, you’ll likely need to do layoffs—and cut your own pay—to stay in business.
  2. You probably over-service the huge client, which eats capacity you could use to help more-profitable clients.
  3. Huge clients know they’re big, so they often demand whatever they want. When you give in, you hurt profit margins and your team’s morale.
  4. Their big revenues make you complacent about bizdev, which makes it even harder to replace them if they go.
  5. If you want to sell your agency in the future, you’re hurting your agency’s valuation—the buyer will discount their offer because they know the huge client could fire you.

Let’s look at how to check if you have a Client Concentration problem, and then look at how to fix—and prevent—the problem.

How to calculate if you have a Client Concentration problem at your agency

Ideally, you’ll see if any clients are more than 20% of your agency’s profits—but most agencies don’t track profitability by client. If you don’t track profitability by client, you can use percentage of revenues as a proxy for now.

In your accounting software, look for a report called “Sales by Client Summary” (QuickBooks), “Income by Contact” (Xero), or similar. Run the report four times:

  1. For the past month
  2. For the past three months
  3. For the past 12 months
  4. Since your agency started

If a client is more than 20% in a single month, that’s fine if it’s due to a large, one-off invoice. But when a client is consistently more than 20% of your agency’s business for 3+ months (or a year… or ever since your agency started), you’re taking a risk.

There’s also a non-financial Client Concentration risk—where they’re less than 20% of your business but require more than 20% of your agency’s client service attention. In that case, use my free Client Ranking Matrix tool to evaluate which to keep vs. which to fire.

Got a “more than 20%” client now? Here’s how to fix the problem right now.

8 steps to fix a Client Concentration problem

Here’s my eight-step process to fixing a current Client Concentration problem.

  1. Create a list of your at-risk clients, with the business percentage from each one. If you’re not a numbers person, recruit an operations person to help you—your head of operations, your accountant, or a project manager.
  2. Don’t beat yourself up. To normalize the situation, Client Concentration is a common problem at marketing agencies. I see this problem a lot. Don’t be too hard on yourself—you’re not alone in facing this. Let’s focus on fixing the problem, not blaming yourself.
  3. Set milestone targets for reducing their percentage. The milestones will depend on how overweighted the client is now. For instance, if a client’s 25%, you might try to make that 20% in two months and 15% in four months. If the client’s 45%, you’ll need to set milestones that reach further in the future.
  4. Evaluate current sales opportunities to see which might help offset the overweighted client(s). If you’ve got a big prospect that would make the huge client fall below 20%, it’s worth spending some extra sales time to close the new prospect. This includes making the most of your sales proposals.
  5. Outline a plan for what you’d do if you lost the overweighted client(s). This is your “worst case situation” plan. It might includes layoffs, delayed vendor payments, a personal pay cut, and other cost-cutting measures. Making this plan may seem grim, but it’s better to make the plan now—when you still have the client—than when it’s crisis mode because you’ve gotten the “you’re fired” call.
  6. Look for ways to upsell your other existing clients. This is the “low-hanging fruit”—getting more revenue from other clients helps reduce your dependence on the big, overweighted clients. A percentage point here, two percentage points there—it all adds up.
  7. Let your team know you have a plan to reduce Client Concentration. This accomplishes two things—it helps morale by letting people know they won’t have to put up with the client forever, and it encourages people to look for upsell (and new sales) opportunities that they might not see otherwise.
  8. Do a debrief. No need to point fingers, but you do want to understand how you got into this position in the first place. For more on preventing Client Concentration in the future, see the next section.

Preventing a Client Concentration problem

Here’s how to prevent a Client Concentration problem from happening (or happening again) in the future.

Focus on having 10-20 active clients. This is an easy-to-track benchmark. I recommend 10-20 because it’s enough clients that a single client won’t be too big, but not too many clients that you run into the flip side—a Client Dilution problem. I’ll share more on Client Dilution in a future article.

Monitor client percentages—and client count—on a regular basis. Track client percentages (monthly and trailing) each month-end. And monitor how many clients you’re helping each month—if it’s regularly less than 10 clients a month, it’s a sign that you’re heading toward a Client Concentration problem.

Accelerate your marketing when a client’s approaching 20% on a two-month basis. This buys you some time to fix the problem, since you won’t close new leads overnight.

Accelerate your sales efforts when a client’s approaching 20% on a four-month basis. If you’re getting 20% from a single client for this long, your marketing isn’t giving you enough options. It’s time to get more aggressive in your sales now, or you’ll regret it a few months from now.

Commit to consistent, long-term marketing for your agency. Agency owner Andy Crestodina underlines this in our recent interview. If you’re considering public speaking as part of your long-term lead-gen plan, read my book on doing speaking for agency bizdev.

Applying this at your agency

If you’ve got a Client Concentration problem now, follow my advice to fix the problem. If you don’t have the problem now, follow my advice on preventing the problem in the future. And if you’re not sure how to apply this at your agency—or you’re feeling overwhelmed by how to deal with a huge client—contact me for consulting help. Your email or call is confidential.

Question: How do you handle Client Concentration problems at your agency?

Image credit: Overload photo by stringer_bel, via Creative Commons

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