What is it?

Customer concentration measures how much a company's revenue relies on a small number of customers. The business has high customer concentration if a significant portion of revenue comes from just a few clients. If revenue is more evenly spread across many clients, it has low customer concentration. This metric is crucial for assessing risk, as a diversified customer base typically presents less risk.

How is it calculated?

To calculate customer concentration, divide the revenue from your top 10 customers by total revenue over the past 12 months. This uses the annual contract value (ACV), factoring in recent upgrades or downgrades. The result indicates the revenue dependence on your largest customers.

What does it tell me about my company?

Customer concentration reveals key insights into your company's risk, growth potential, and financial health. It shows how dependent your revenue is on a few clients, helping you assess whether your business model is sustainable. Monitoring this metric allows you to make strategic decisions about diversifying your customer base and managing risks effectively.

Here’s what it can tell you:

1. Revenue dependency: customer concentration indicates how much of your revenue comes from a small group of clients. A high concentration signals over-reliance, making your business vulnerable to changes in these relationships. A low concentration means a more diversified revenue stream, reducing the impact of losing a client.
2. Business risk: the more revenue you spend on a few customers, the higher the risk. If one customer reduces spending or leaves, your business could take a significant hit. High concentration increases this risk, while a more diversified base spreads the potential impact.
3. Growth potential: a high customer concentration suggests limited market reach and potential barriers to growth. If you rely on a small client base, your business may struggle to expand. A lower concentration indicates greater scalability and adaptability, offering more opportunities in different markets or sectors.
4. Customer loyalty: high concentration might signal strong customer loyalty but also a lack of diversification. While a small group of customers may be highly loyal, a more balanced customer base shows broader appeal and resilience to market changes.
5. Operational flexibility: with high customer concentration, your operations may be tailored to the needs of a few clients, limiting flexibility and innovation. A diverse customer base allows for more adaptability, as resources aren’t over-committed to just a few customers.

What are the underlying data sources?

The customer concentration is based on revenue and customer data.