5 Mistakes That Can Cost You a Major Client, Part 2

Growth is usually viewed as a sign of success, but growth can become dangerous when the  business expands faster than its systems, people, and cash can support. 

In Part 1, we looked at failing to meet client expectations and mishandling a client crisis. Now  we’ll examine two additional risks: accepting more business than your company can  successfully deliver and allowing one major customer to become so important that your  company’s future depends on them. 

Both problems can develop precisely when the business appears to be doing well. Mistake #3: Growing Faster Than You Can Deliver 

Winning a large account can dramatically increase revenue, but revenue alone doesn’t  determine whether the opportunity is good for your business. You must also have the people,  systems, working capital, technology, leadership capacity, and operational resources required  to serve the account properly. 

When growth exceeds capacity, the warning signs often appear quickly. Employees become  overwhelmed, customer response times increase, deadlines are missed, quality begins  slipping, and management spends more time solving emergencies than running the business. 

Perhaps the most dangerous sign is when existing customers begin receiving poorer service  because everyone is concentrating on the new account. 

Growth should strengthen your business, not destabilize it. 

Measure Capacity Before Saying Yes 

Before accepting a significant new account, evaluate what fulfilling the commitment will  actually require. Determine how many employee hours, management resources, materials,  equipment, technology, outside services, and dollars of working capital will be necessary. 

Then ask what happens if the client’s volume increases faster than expected. Could you handle  20 percent more? What about 50 percent more? 

Scenario planning doesn’t require sophisticated financial modeling. Even a simple capacity  discussion with the people responsible for delivering the work can reveal problems before you  sign the contract. 

Calculate the Real Cost of Growth 

A large contract can look profitable on paper while creating unexpected costs throughout the  organization. Additional employees may need to be hired, inventory purchased, equipment  acquired, software upgraded, or suppliers paid long before the client pays you. 

Include these costs when establishing your price.

Revenue growth without profit and cash flow isn’t healthy growth. You don’t want to celebrate  your largest contract ever while wondering how you’re going to make payroll. 

Build the System Before You Need It 

Don’t wait until everyone is overwhelmed before improving your operations. Review your  processes while the business is still manageable. 

Document how important work gets done, clarify responsibilities, identify bottlenecks, improve  communication, and establish contingency plans. Cross-train employees where appropriate so  critical responsibilities aren’t dependent on one person. 

The goal isn’t to eliminate every possible problem. It’s to create enough structure that the  company can respond to growth without falling into constant emergency mode. 

Mistake #4: Becoming Too Dependent on One Client 

A major account can transform a business. It can also create significant risk if too much of your  revenue or profit comes from that one relationship. 

Clients change leadership, reduce budgets, merge with competitors, change strategies, bring  work in-house, experience financial problems, or simply decide to use another supplier. You  may provide outstanding service and still lose the account for reasons completely outside your  control. 

Ask yourself a difficult question: “What would happen to our company if our largest  customer disappeared tomorrow?” 

If the answer is layoffs, missed payments, or a financial crisis, the business is too dependent  on that customer. 

Know Your Customer Concentration 

Owners should regularly examine what percentage of total revenue and gross profit comes  from their largest customers. There isn’t one percentage that’s appropriate for every business,  but the principle is straightforward. 

As one client’s share of your business grows, your financial exposure to that client’s decisions  grows with it. 

Pay attention not only to revenue concentration but also to profit concentration. A client that  represents a large portion of sales but relatively little profit may create even more risk than the  revenue numbers initially suggest. 

Diversify Before You Have To 

The best time to find your next major client is while your current major client is happy.

Continue marketing, networking, developing referral relationships, and pursuing new  opportunities even when your business is busy. Don’t shut down business development  because one large account has temporarily filled your capacity. 

A healthy business has multiple sources of revenue and a consistent pipeline of future  opportunities. 

Diversification gives you negotiating strength as well. When you’re financially dependent on one  client, it becomes much harder to say no to unreasonable requests, defend your pricing, or  walk away from an unprofitable agreement. 

Protect the Relationship Without Becoming Dependent on It 

Reducing concentration risk doesn’t mean treating your largest client as less important.  Continue delivering excellent service, developing relationships throughout the organization,  and looking for opportunities to expand the partnership. 

At the same time, strengthen the rest of your business. 

The objective is balance. You want important clients, but you don’t want any single client to  have the power to determine whether your company survives. 

The Bottom Line 

More business isn’t automatically better business. 

Before accepting a major opportunity, determine whether your company can deliver it  successfully and profitably. Understand the operational requirements, calculate the true costs,  prepare your people, and strengthen your systems before the additional volume arrives. 

Then continue building your customer base so one successful relationship doesn’t become a  dangerous dependency. 

The goal isn’t simply to grow. The goal is to build a business strong enough to handle  growth. 

Call to Action 

Is your business prepared for the next major growth opportunity? 

Schedule a complimentary Growth Strategy Session and discover how to evaluate capacity,  strengthen operations, protect profitability, reduce customer concentration, and build a  company that can grow without losing control.