The negative impacts of the current economic downturn have spotlighted the weaknesses of manufacturing firms of all sizes and their reliance in some cases on one or two major customers. “Single-customer syndrome” can sink your business, because if your main customer sneezes, you are likely to catch the flu.
If your company relies on at least 80 percent of its total revenue from fewer than three customers, you are a candidate for single-customer syndrome. To understand this situation, take a look at the lower-tier automotive suppliers that have been heavily affected by a drop in orders from an automotive manufacturer or tier-one supplier.
Do You Have Single-Customer Syndrome?
If your main customer has a problem with the demand for its products, your company will likely be one of the first to know. Take this simple test to determine your current condition:
- Are your sales reliant on three or fewer customers?
- Are they all in the same or similar industrial market segments?
- Are these market segments related to the U.S. domestic automotive industry, or are the primary segments you serve trending down in terms of growth?
- Is your sales team largely inside sales and mostly responsible for the care and feeding of your main customers?
- Is your company’s history largely based on serving these customers and market segments?
If you answered yes to most of these questions, your company likely suffers from single-customer syndrome.
How to Avoid It
The following approach will help your company begin the process of diversifying your customer base and minimizing your reliance on a small set of customers and markets.
First acknowledge your current condition and the weaknesses you have internally in terms of markets, customers, products, services, marketing, sales, and processes. Sit down with your management team and ask yourself the previous questions. Then list the weaknesses you have as a business that inhibit your ability to find and develop new customers in new markets.
Now reverse the process and ask your team what strengths you have that can potentially be leveraged to help find new customers. If you are an automotive supplier, you are in better condition than you might think compared to potential competitors because you probably have an ISO 9000-2000 certification, have begun implementing some of the elements of lean to take waste out of your processes, and are using other best practice procedures that you have been required to adopt.
List all of your customers and scrutinize the smaller ones that are in different market segments than your main customers. Are any of them exceptionally profitable? Do any appear to represent new growth potential? Does your company match up particularly well with any of these customers? If the answers are positive, you have the beginning of a market diversification strategy, that is, a strategy to find more customers like these in specific market segments. If the answers are negative, you will need to do more analysis and research to find other potential market segments to go after.
Take a hard look at your marketing and sales processes. If they are mostly internally focused and if your sales representatives have little experience in finding new markets and customers, this is your first order of business to change.
Do you have team members who excel at outside sales or have the potential to do so? These people deserve your attention. They should be developed and given new skills and support to become “sales hunters.” You need more of these people to diversify your business.
You should also consider integrating your sales and marketing efforts so they mesh to generate new sales opportunities. Sales needs support from marketing and vice versa. In particular, sales team members need help with market research in understanding decision-making drivers from potential customers and other intelligence beyond Web sites and brochures. Marketing needs direction from sales in terms of what new opportunities are presenting themselves from first-hand experience.
Charlie Alter is the owner of Bentbrook Advisors LLC based in Sylvania, Ohio. He specializes in growth strategy, innovation, and coaching.