Customer Concentration

When a few customers account for a large share of revenue, losing even one of them could seriously damage the business. Customer concentration is a key risk factor examined by investors, lenders and buyers of businesses.

For example, a supplier that earns 35% of its revenue from a single large retailer is highly exposed. If the retailer switches suppliers, demands price cuts or goes out of business, the supplier's revenue and profits could fall sharply.

Concentrated customers often have strong bargaining power, so they may push for lower prices, longer payment terms or extra services, squeezing the supplier's margins.

Customer concentration is common in industries such as defence, automotive supply, contract manufacturing and business software sold to large enterprises. It is not always negative, since long-term relationships with large customers can be stable and lucrative. But businesses with high customer concentration are often valued lower, and buyers may require protections such as earn-outs in acquisitions.