Understanding client concentration
In my previous post, I touched on client concentration and the risk that an agency faces when a client makes up over 15% of revenue. Circumstances outside of your control mean that you can lose a client despite offering an excellent and valuable service with amazing outcomes. It’s normal for a new agency to rely on one, two or a few clients, but the more established should regularly review their revenue by client over the past 12 months and address any over-dependence.
Using visuals, I have outlined three different agency client concentration profiles that I have come across. They are based on having 20 clients from a healthy spread to an extreme over-reliance on a single client.
An agency with a healthy client spread
This is an agency with a healthy client portfolio spread with no client making up more than 15% of revenue. To lose one of the major clients wouldn't put the agency at risk although it would adversely affect profit. The agency should continually review their client concentration to monitor their largest clients. By growing the smaller client accounts and adding valuable clients, they can avoid becoming over-reliant on the larger clients should their accounts grow.
An agency where the Pareto principle is applying
The Italian economist, Pareto found that 80% of results come from 20% of cause or effort. Many agencies will find that roughly 20% of their clients generate around 80% of revenue. In this example, the top four clients (20%) make up 77% of the total revenue. Losing a major client would have a serious financial impact on the agency. The agency should look to grow the smaller client accounts and win new high value clients to mitigate risk.
Agency at risk - dependency on one client
This agency is overly dependent on one client and must retain them to continue in business as usual. As with the Pareto principle example, growing smaller accounts and obtaining higher-value clients are required but it will be a longer process to de-risk.
Please get in touch if you would like to learn how our regular management information packs, which includes client concentration, can help your agency.