Smart business strategies for diversifying your customer relationships
Entrepreneurs often talk about the prospect of scoring a big client in hunting terms -- catching the elephant, hunting the bear, reeling in the big fish. Landing a big client means more prestige, better connections, and bigger paychecks. But relying on a client for a large chunk of your revenue can put you in a vulnerable position, especially if you have hired more staff or neglected your other clients to cater to its whims. "No matter how seductive it is to have a client like Amazon or Wal-Mart, those deals go away," says Kerry Sulkowicz, founder of the Boswell Group, a consultancy based in New York City.
Sam Chapman knew that was a possibility when Morgan Stanley hired his 20-person Chicago PR firm, Empower Public Relations, to represent some of the brokers in the financial firm's local office. The account made up 33 percent of Empower's annual revenue. Everything was going well, until Morgan Stanley suddenly dropped Chapman's firm in preparation for its merger with Smith Barney. Chapman was left scrambling. He had to dip into his personal savings to make payroll.
Experts caution small businesses not to depend on one client for too much revenue. But no one wants to turn down a big account, especially in a recession. So, how does a business manage to reap the rewards without putting everything at risk?
Watch the percentage
For Terralever, a Tempe, Arizona, interactive marketing company that works with brands such as Red Bull, BMW, and Microsoft, managing risk starts with getting an appropriate client mix. Ideally, no one account -- and no one industry -- would represent more than 25 percent of revenue, says Scott Miraglia, Terralever's chief operating officer. "You almost want to look at it like a portfolio of stocks. You don't want to have everything in just one industry," he says. For example, says Miraglia, a great number of interactive agencies catered exclusively to the auto industry, and many of them folded in the wake of the sector's demise. At Terralever, Red Bull represents about 20 percent of the company's annual revenue, but Miraglia works hard to keep the percentage under control.
Terralever, which started with one Red Bull event in 2005, now works on 45 projects for the energy drink company's global and North American divisions and has seen revenue from Red Bull increase 30 percent to 50 percent annually. That has prompted Miraglia to hire more salespeople and spend more of his company's revenue on business development. Focusing on sales can help prevent you from being lulled into a false sense of security, says Constance Bagley, a professor at Yale School of Management. "You can't stop being scrappy. It's a matter of mental discipline. You have to constantly be thinking that things can change dramatically in 60 to 90 days."
For some companies, diversification isn't always an option. "I would like to have a nice balance of clients," says Chapman from Empower Public Relations. "But two things happen when you're a growing business. You get lucky sometimes -- and sometimes you have to shrink very quickly." If you are not able to diversify your portfolio of clients, then you need to be prepared to scale down as fast as you scaled up.
When Chapman landed the Morgan Stanley account, he was cautious about staffing up, hiring only a few employees and pushing his staff to work overtime to handle the extra load. "I tried to do it so that we would be really stretched as a firm at the beginning of the engagement," he says. As a result, Chapman had to lay off only two people when Empower lost the account.
At Terralever, Miraglia hires freelancers to handle 20 percent of the firm's overall workload. That way, he figures his company can sustain the loss of the Red Bull account without having to "cut into the muscle of who we are." Of course, it's not always easy to stay nimble when you are trying to please a big brand. After two years of flying back and forth from Tempe to Red Bull's North American headquarters in Santa Monica, California, Erin Enriquez, who manages the Red Bull account, opened a four-person Santa Monica office in 2008. Although workers in the satellite office devote 75 percent of their time to servicing Red Bull, Terralever's goal is to use the location as a springboard to diversify its client list.
Manage the relationship
Even if you planned for the possibility, no one wants to lose big clients. So, how do you make sure they hang around for as long as possible? Big companies are looking for value, says Bagley. Figure out your client's immediate concerns. "Make sure the information is flowing both ways," she says. "What info can you bring them about their costs and competitors? Have your account manager talk to their counterpart; have your salespeople talk to their R&D."
Enriquez uses this strategy with Red Bull by focusing on the client's desire to be perceived as technologically forward in its online marketing. "The No. 1 thing is to be aware of the competition and what they're doing, and what new types of technologies are out there," says Enriquez. "Red Bull appreciates us coming to them and pitching them and usually agrees to let us do a portion of that work."
Plus, once you have that competitive insight, you can use it to attract new clients -- especially if your contract isn't exclusive. "It's a lot like high school dating," says Bagley. "Nothing makes you more desirable than the fact that someone else wants you."