The Importance of Diversifying Your Business

Addict with SyringesI had a great conversation with a friend of mine. He was bemoaning the fact that his company was almost completely dependent upon one huge customer. He saw the inherent risks in that relationship but confessed his organization had a bad habit they couldn’t kick. They had succumbed to the addiction of predictability and comfort.

Is your business overly-reliant on one key customer? Is your organization tied closely to one key client or partner or supplier? If that customer went away, would your world come to a crashing screeching halt? The rule of thumb I’ve always heard is no customer should be more than 25% of your business (and the same holds true for your suppliers or partners).

We always hear about diversification but usually it’s in the context of our stock portfolios. If your 401k became a 200.5k in the past few years, you know what I’m talking about. It’s easy to do the diversification thing in a portfolio – sell a few stocks, buy a few stocks and presto! you’re done. Diversifying your customer base is much harder to do.

If you’ve never thought much about this topic (or even if you have) you need to understand the true risks involved in not diversifying, understand why it’s hard to diversify, and use some practical methods to achieve the diversification goal.

The True Risks of Not Being Diversified

Some of the risks are obvious. If your primary client goes out of business, changes strategy, or severely curtails spending there’s a gaping hole in your revenue stream. These things can happen at the whim of a new executive team who wants to use their favorite supplier instead of you. This revenue risk is the easiest one to understand.

The deeper risk is what I call absorption risk. That’s where you do so much work for one customer that you begin customizing your processes, products, and services to meet that customer’s needs. You change hiring and training practices. you change marketing strategy. You change product specs all to best meet the needs of your most important customer. Then you wake up one day and realize you’re simply a subsidiary of that customer and your product and processes have become so custom that they can’t be sold anywhere else in the market. At that point you should simply ask to be acquired.

Why it’s Hard to Kick the Habit

When those predictable, big, juicy contracts come in, your primary focus becomes product/service delivery to that huge customer. You pay short shrift to new business development. If there’s a trade-off to be made be made between giving the big customer what they need or serving a small customer, you’ll always choose the former.

On top of that, you get so focused on customizing your business to the big customer’s needs and meeting their product/service delivery needs that you don’t invest in selling resources to find new business to diversify away from that big customer. The less you do that, the more dependent you become on that big revenue stream. Cue vicious circle footage.

How to Kick the Habit

1. Set explicit new customer acquisition goals and dedicate resources to that plan. You must be unwavering in your commitment to that new customer acquisition strategy. If you aren’t going to do that, simply stop reading now and go service your big customer because that’s clearly more important to you.

2. Push back on customization. If the big customer wants something custom, question whether it really needs to be. At least ask yourself if that customization is a true product improvement that others in the market will want. If it has broader market applicability, it’s a product enhancement. If not, you’re simply tying yourself more closely to the big customer. At least do yourself the favor of charging your big customer for the customization. Custom need not be free. If you give it away, you’re only hurting yourself.

3. Build new products/services that target a different market. Find something your big customer won’t be interested in buying (but that’s still consistent with your strategy and capabilities). Build that product/service and go sell it in a new market. Ever heard the phrase “innovate or die” before? Ya. That.

Diversification is tough. It’s even tougher if you’re not proactive about it and focused on driving the result. If you don’t do it, you only have yourself to blame when the impending implosion occurs. Go take care of your business long term and diversify. You’ll be glad you did.

Mike Figliuolo at thoughtLEADERS, LLC

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