Revenue Concentration

A business with diversified revenue is generally less risky than one that relies heavily on a few sources. Revenue concentration measures this dependence.

It is often expressed as the share of revenue from the largest source or sources. For example, if a company's largest product accounts for 60% of its revenue, or its top five customers for 70%, its revenue is highly concentrated.

High concentration creates risk. If a major customer leaves, a key product becomes outdated or a main market weakens, revenue could fall sharply. It can also reduce bargaining power with large customers.

Investors and lenders assess revenue concentration when valuing or lending to a business, and highly concentrated businesses may be valued at a discount. Companies may also be required to disclose major customers in their financial statements; under IFRS and US GAAP, customers accounting for 10% or more of revenue must generally be disclosed. Reducing concentration often involves expanding into new products, customers or regions.