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Relying on too few customers presents risks. See how broadening your base can benefit your business.
Recently, UPS decided to cut back on the number of packages they deliver for Amazon, their largest customer. It’s clearly a move to diversify their customer base. Let’s take a look at the business logic behind their decision and how small- and medium-sized businesses might apply UPS’s thinking to their own operations.
Go for more profitable customers
UPS chief executive Carol Tomé was very blunt about cutting back on the customer that accounted for more than 10% of their business, stating that Amazon simply isn’t their most profitable customer. UPS will now deliver 50% fewer packages for Amazon.
How to apply this thinking: Go beyond on how much revenue each customer brings in and evaluate the profit margin for each. Realign your efforts to where you can gain in profitability.
Lower risk
You know the adage “don’t put all your eggs in one basket.” This folk wisdom recognizes the value of diversification.
A lot of consultants and solo entrepreneurs build their businesses with just one client. The risk with this is that a change on the customer’s side—say, a budget cut or downturn in business—can mean a severe drop in income for the small business owner.
At UPS, leadership saw risks with relying on one customer for 10% of their business and made a decisive move to limit their service to Amazon.
How to apply this thinking: Assess how much of your earnings are tied to each of your clients. Is too much of your fortune tied to just one or a few clients? It may be time to follow the UPS example and cut back on service to one customer and bring others into the fold.
Find opportunities to grow and adapt
Before UPS announced a shift with Amazon, they had already identified new opportunities. One was to enhance their delivery of healthcare goods, which often need temperature-controlled and time-critical logistics.
How to apply this thinking: Are there customers adjacent to what you already do that would provide opportunities to grow? For example, if you own a restaurant would catering bring in additional business? Or, if you’re a consultant could coaching or training programs be more profitable?
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Consumers business loans
Do you have business banking questions? Contact our knowledgeable commercial loan officers.