This is the fifth in a series focusing on the big challenges facing small business owners and managers in this anxiety-ridden election year filled with uncertainty about the economy and the future. Previously we focused on when to hire new employees, whether you should provide employees healthcare benefits, how to increase your small business’ revenues from one year to the next, and how information overload can cripple your company. Now let’s focus on how to broaden your revenue streams and keep your business from being overly dependent on one or two big clients.
“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
That particular bit of wisdom has been credited to legendary financier J. Paul Getty, but slightly different versions have been attributed to John Maynard Keynes and others. But whoever said it first, the saying points to the danger of imbalance in close business relationships. And if you’re a small business owner and manager you likely understand, and worry about one particular kind of business relationship imbalance; the one between your business and a client or two who represent a huge percentage of your revenues.
It’s easy for small businesses to get into a position of client imbalance. Unlike very large companies that develop a broad array of products or services and sell them to many clients or customers, small businesses face the limitations of what one person, or one small team of people can realistically finance, produce and manage. They also are limited by small-to-non-existent marketing budgets and the inherent difficulty in finding and developing a long list of clients. Thus, small businesses often become overly dependent on one or two clients.
The dangers in that are obvious:
Should a client on which you are over-dependent fail or dramatically reduce their spending, your small business’ survival could be put into serious question.
Should such a client attempt to squeeze a lower price for your small business’ products or services, you could be faced with an ugly decision between a big reduction in revenue for the same amount of work, or a complete loss of that customer and their revenue.
So how can you avoid, or stop being overly dependent on one or two clients? The answer is both obvious and easier said than done: broaden your company’s revenue streams. But how do you do that? Here are nine practical suggestions:
- Develop products or services in adjacent categories for your current customers or clients. What is it that your business really does? Don’t answer that question in terms of a specific product or service but in broader terms. If you sell or broker nails, your clients aren’t buying nails from you, they’re buying extruded metal for specialty uses. How else can you extrude metal to meet their needs? Or what other extruded metal products can you broker to your customer? While this approach won’t help spread your risk over more clients, it will spread your risk over different products or services.
- Offer similar products or services for different customers in adjacent categories. If you’re providing back office services for housing contractors, can you extend those services to commercial building contractors?… or to building materials vendors?… or to construction equipment rental companies? If you’re making equipment for hospitals can you begin to provide the same equipment to specialty clinics, doctors’ offices or other organizations that could benefit by bringing that equipment to their own customers outside of the hospital environment?
- Go after government contracts for your products or services.
- Seek customers for your existing products and services in regions where your current primary clients or customers do not compete.
- Open a new location that will get your products or services closer to potential clients or customers who would do business with you if only you were more conveniently located for them.
- Create new marketing channels – the internet, Ebay, Craigslist, social media networks, etc. – where you can build an audience with quality content about your product or service category. Increasingly you can find ways to advertise inexpensively in those channels, and all it takes is a well written Excel VBA sheetto track it all an automate it.
- Form an alliance with another product or service provider outside your region to jointly market your similar products or services in regions neither of you currently compete. You may offer competing or simply aligned products or services. And alliance reduces your capital risk and can keep you from having to spend a lot of money up front before new orders or contracts come in. The downside is that you won’t get 100% of any new sales generated.
- License or franchise your products or services to others. You will get a share of their revenue as they grow while reducing your own risk.
- Acquire the rights to sell other products or services alongside your own, both to your existing clients or customers and to new customers or clients who prefer vendors that can offer multiple solutions as a package.
Still, there are challenges related to each of these potential approaches to broadening your sources of revenue. And it’s likely that if you’re facing such decisions, you don’t have a wealth of experience in sorting through all the risk/reward equations, or analysing the attending financial manoeuvres that you could be required to make. So, it’s always good to draw on the experience others who’ve been there and have learned from their experiences.
Engaging a business consulting firm is one obvious potential move. Another, less obvious move, would be to draw upon the wisdom of a CEO peer advisory board. Such “board” members not only can offer you advice from their experiences (good and bad) in dealing with universal business or small business issues, they also likely have many contacts who could become your customers or clients, or who could connect you to new customers and clients.