IS YOUR BUSINESS FALLING VICTIM TO THE THE CLIENT TRAP!?
Every trade business has a collection of what we call ‘customer channels’. And customer channels are simply the different channels that your business sources it’s work from.
Often times, however, we see trade business owners becoming overly dependent on 1 or 2 sources of work, whether that be 1 or 2 larger clients (such as builders or larger contractors), 1 or 2 property managers, etc. or 1 or 2 marketing methods for leads, whether this be an ad in the local paper, or ‘word of mouth’ marketing and so on.
This is extremely dangerous and raises some serious red flags.
When you’re overly dependent on 1 or 2 larger clients, or 1 or 2 sources of leads, you’re at risk of accounts receivable concentration. This is the level of risk your business faces due to the diversity of your customer channels.
What this means is simple.
The greater the diversity of customer channels, the lower the risk. The lower the diversity of customer channels, the greater the risk!
A common scenario that we’ve seen is trade businesses falling into the trap of having one or two key clients accounting for 70, 80, 90, or even 100% of their total work! They get a new customer, then they renew with that customer for more jobs, and soon that single customer accounts for a large portion of their total revenue.
When this happens, (1) you can no longer say no to their projects or T&C’s, as your business is too dependent on their work (they hold the pricing and negotiating leverage which can decrease your profit and power); (2) if current management gets outed, the new management may want new subcontractors etc. – leaving you high and dry; (3) if they make errors that lead to insolvency or even just experience cash flow problems, chances are, you’ll go insolvent or be largely affected too; and (4) lack of diversification looks risky, so the business’s value decreases.
In regard to lead sources, what happens if you are using someone else’s platform and they change the rules (Facebook, Instagram, LinkedIn, Google etc.)? Or your accounts are hacked? Or something happens to that platform? Or any other external event effects the source? Are you overly reliant on one source of leads, one marketing channel? Or do you have work flowing in from multiple sources?
I’ll give you an example (extreme example, but this stuff happens), we know a guy that did all the fibre glass work for Riviera Boats (Australia’s premium luxury motor yacht builder). As Riviera grew, he had to grow his business to meet the demand. With 100 employees under him and 98% of his business’s work coming from Riviera, he was an estimated 6 months away from being financially set for life.
However, out of nowhere, Riviera took a massive financial hit, and the supply to his business stopped almost overnight and the entire business went under and he lost everything…
It can be so easy not to worry about diversifying your business, and not to worry about developing different customer channels because if you’re already do okay and things seem fine, why would you?
But think about what happens when it isn’t?
Your customers are like an investment portfolio.
A healthy investment portfolio is designed so that one investment cannot jeopardise the return for the whole portfolio. Likewise, you must learn to manage your clients so no one client can put a significant percentage of your business’s revenue at risk.
You can’t be overly reliant on one builder, one client, one project, your cousin’s business, one relationship, one supplier, etc. Because any small change in circumstances outside of your control could have a devastating effect on your business!
So, ask yourself this question, what would happen to your business if your biggest customer vanished?
Could you replace the lost revenue overnight and have the resilience to recover? Or is it game over?
A good rule of thumb is to ensure that no single customer accounts for more than 10-15% of your total revenue. So, if that client leaves you, your business has some resilience to replace that revenue with new clients over time – and your business isn’t put on life support or sunk overnight!
The best way to achieve this is to start building a solid revenue foundation for the business with a series of predictable clients (no less than 5) before trying to grow revenue fast with larger clients. But more importantly, get your marketing set up right across MULTIPLE customer channels! You want leads and work coming in from a variety of sources.
This is all about ‘what if’ scenarios… think about Murphy’s Law: Anything that can happen will happen.
Keep your business safe and implement the necessary strategies to keep your business portfolio spread out. Over reliance on one or two major customers or one or two sources of leads is unnecessary risk that can and will come back to bite you.
So, look at your current client portfolio, how healthy is it looking? How many sources of leads do you currently have? Do you need more?
Think about your ‘what if’ situations.
If you're an electrician, plumber, painter, carpenter, or any other trade business owner who is looking to take your business to the next level, click here to learn more about how our team can help!