Decreasing Customer Concentration and Increasing Diversification in Tough Times
It is always a good time to consider how vulnerable your business is to revenues by industry, geographical area, and products / services sold. Developing a strategy to diversify your exposure and reduce your concentration by industries, locations and products makes a great deal of sense in today's marketplace.
Several times a year, all business owners should strategically consider any ways to diversify the sources of revenues as well as decrease or spread out the concentration of sales across multiple customers, industries, products. The reason this is important is to mitigate your risks caused by concentrations and maximize your profit potential.
Diversification: To the extent it is possible based on the type of business you own, I am suggesting a strategy to spread your revenues across both vertical markets and geographical areas. Obviously this isn’t possible for retail type businesses or businesses that can reasonably serve one vertical market or geographical location. However, many businesses do have the flexibility to spread out their customer base, industry served, and geographic market area.
An good example might be a temporary staffing company that handles staffing to the light industrial market in market like North Dallas. This area known as the telecom corridor is home to many large telecommunication companies and semi-conductor manufacturing concerns. Business can fluctuate considerably in both of these industries and history has proven that the peaks and valleys can be significant. A diversification strategy might include serving other industries that are not as susceptible to the same forces as the telecommunication and semiconductor industries are. Medical staffing might be an answer. Though you would have to acquire domain expertise in that industry, the industry is somewhat recession proof and the revenues generated in that industry have less peaks and valleys than light industrial staffing does.
A company can also diversify its sources of revenues by adding additional locations in markets not currently served. If you are considering adding an additional location, consider the type of customers you will be serving in the new area. Consider the differences between your current geographic sales area and the new one. If possible, compliment the mix of types of industries served or customers served.
Concentration of Revenues: One normally considers individual customers when they think of concentration of revenue, but concentration by industry is also important. Last year I worked with a manufacturer of bonded fibers. The best example of something made from bonded fibers is the trunk liner in an automobile. In my customer’s case, they had the capacity to create many types of products for customers in addition to trunk liners, headliners, and other components to automobile manufacturing. This customer had a 60% concentration of revenue that came from the auto manufacturing industry. They recognized that they would be very susceptible to downturns in auto sales, so they adopted a strategy to greatly increase their sales of craft batting material and specialized bonded fibers used in airplanes and upholstered items like chairs and mattresses.
In addition to serving other industries to spread out the concentration of sales to the auto industry, this client also begin selling hard to the auto makers that were more financially sound, like Toyota, BMW, and Mercedes. As painful as it was, the began turning down orders from Ford and General Motors. It has been two years since they aggressively began spreading out their revenues and today less than 40% of their total revenues come from the auto makers, and they have moved from serving less stable automobile manufactures to serving the ones not being affected as badly by the economy.
Since there are as many strategies as there are companies, you may need to think “out of the box” when deciding on a strategy to spread out revenues by customer, geographical areas served, and products sold.
