Key Performance Indicator of Customer Concentration (CC) in Startups

Key Performance Indicator of Customer Concentration
Performance Analysis
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Imagine a business having only one customer, that is, there is only one revenue stream. In this case, the business must be very cautious about the behavior of its purchaser because the business status depends on that customer. In fact, whatever happens to that customer, good or bad, happens to the business, too. The key performance indicator of Customer Concentration (CC) shows each customer’s share in the total revenue of that business. 

How to Choose Key Performance Indicators for Our Business?

Examining the key performance indicator of Customer Concentration (CC) and its calculation provides answers to questions such as how is Customer Concentration in your business?, How diverse is your customer base, and are you in touch with a wide range of customers?  

What is the key performance indicator of Customer Concentration (CC) and how is it calculated? 

As mentioned earlier, the key performance indicator of Customer Concentration (CC) indicates how the total revenue is distributed among different customers. A business that offers a product or service to a large number of customers has lower Customer Concentration (CC) than a business dealing with a small number of customers. The key performance indicator of Customer Concentration (CC) is obtained from the following equation. 

Customer Concentration (CC) = Revenue Generated by Key Customer/ Total Gross Revenue in a Time Span 

The annual time span is usually considered to calculate the key performance indicator of Customer Concentration (CC). Simply put, high Customer Concentration (CC) indicates that a small number of customers account for a high percentage of the business’s annual sales. But how do you recognize whether a business has a high or low Customer Concentration (CC)? According to global standards, if one customer accounts for 10% or more of your revenue and if your 5 big customers make up 25% of your revenue or more, your business has a high Customer Concentration (CC). High or low Customer Concentration (CC) has its advantages and disadvantages. High Customer Concentration (CC) enables the business to build long-term relationships with its few large customers and has more resources available to customers to use according to their needs. In addition, in many cases, customers act as business partners.  

On the other hand, a high key performance indicator of Customer Concentration (CC) has significant negative impact that can be more effective than its benefits in the long run. Since having such customers is always tempting, it is difficult to distance the business from large customers, especially in the business growth phase, but the negative effects of having large customers must be considered beforehand. Forbes Magazine cites the key performance indicator of Customer Concentration (CC) as one of the most important risks for startups.

The following are some of the risks associated with the KPI of CC

  • Although earning a high income from a small number of customers seems attractive, losing all customers at once can have a devastating effect on the revenues, profits and cash flow of that business. Therefore, one of the most important risks of having a high Customer Concentration is the negative effects of customer decisions on the business. 
  • Although businesses make attempts to make the best contracts, several factors such as economic fluctuations, competitive pressures for both the business and customers can lead to the loss of a key customers. In any business, losing customers is undesirable, but losing 10% or more of revenue in a short period of time can encounter a business with many challenges. 
  • When the key performance indicator of Customer Concentration (CC) is high in a business, the customer has a large share of the business; in this case, the customer can exert the downward pressure of the price and this becomes a lever for smaller customers, ultimately reducing profits and cash flow of the business. 
  • In the review of business performance by purchasers or investors, the high key performance indicator of Customer Concentration (CC), due to the dependence of the business on a small number of customers, has a negative impact on the performance and value of the business. 

In general, it is better for businesses not to have a key performance index of high Customer Concentration (CC); otherwise, they should take steps to share risk among more customers and different sectors. Putting all the eggs in one basket is assumed as a big risk for businesses! 

It should be noted that the selection of key performance indicators for a business is influenced by the maturity level of the business, the market in which it operates, the competitive environment and many other factors that require sufficient knowledge and experience. Retiba’s experts are ready to carefully evaluate your startup business model, select key performance indicators, and analyze your business performance. All you have to do is enter your information in the evaluation application form and wait for Retiba’s experts to contact you. 

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