Diversifying Your Customer Base  

Learn to evaluate and adjust your mix of clientele for optimum profitability and stability.
Sept 2, 2009

One way to ensure you have a good customer mix is to avoid having too many customers who have businesses that serve seasonal niches. Fairs and sports are two examples of niches that can be seasonal, so you would not want to let your customer mix get too heavy in either of these niches.

By Greg Kitson, Contributing Writer 

While the economic lows that many American markets have been experiencing for the past year are certainly painful, they’re also nothing new. Historically, the tide of business success continually ebbs and flows, with one market experiencing a rush of good fortune while another watches its revenue all but dry up. This cyclical nature of business is precisely why decorators must have a diverse customer base that allows them to weather slowdowns — or even meltdowns — in parts of the economy.

About eight years ago, the dot-com bust spelled big trouble for any decorator who did business exclusively with companies like Microsoft, HP and Apple. Similarly, any decorator today who has pinned his business success on the financial or housing markets is probably in a world of hurt. Just as you shouldn’t put your entire stock portfolio in a single company or market segment, you definitely don’t want to place all of your business eggs in one basket.

In an ideal world, you would work your staff, resources and equipment at 100% capacity, 40 hours a week. This perfect scenario would mean that you incur no overtime, and you get the most out of all capital investments. Will you ever reach and maintain this perfect state? Perhaps not — but you should try to get as close as possible.

Keeping An Eye On The Mix
How do you know if you have too much business built on a particular market or niche? Seasonality is a big red flag. As a football-focused shop, for instance, you may find yourself moderately busy in early summer and extremely busy from early fall into winter. Then you may find your presses idle from February through May.

It’s all well and good that you’ve built a successful business around one profitable niche market, but if that football business disappears, you’re in big trouble — so you need to diversify now to be ready in case the worst happens.

When you really think about it, practically every market experiences some seasonality. The answer, then, isn’t to search for the perfect market that never has a down period, but instead to diversify your customer base to the point that you stay busy throughout the year. If you keep busy in the fall with football, find a counterpart niche that will keep you busy in the spring. If your region experiences very cold winters and most of your customers are tradesmen and construction workers, their business will slow dramatically in severe weather. You need to build up other customers to make up for those slow periods.

A shop-management software program is a great way to keep a close eye on your customer base and analyze its makeup. Run reports regularly to see how much business you’re getting from whom, and from which markets. Our shop reviews sales reports each quarter to evaluate our diversification.

For this to work, it’s crucial that employees tag new customer records by business category. The percentage of customers in the database that are not classified by category reduces the accuracy and usefulness of reports accordingly.

Examples of tags include school, corporate, construction, restaurant, sports league, Greek organization, etc. And you can add a sub-category by using two tags, such as “sports league” and “baseball.” Too many decorators have purchased shop-management programs and then do not take advantage of this powerful analysis tool, which is basic to database management programs.

At a minimum, you should know who your top 10 customers are — not just so you can track how much business each represents, but so that you can treat them accordingly. For instance, send them Christmas cards or offer preferred pricing. Stay in touch with these top customers and you will be more likely to get an early read on changes in their business that, in turn, will impact you.

Ultimately, there are no magic numbers that fit every decorator’s shop in terms of how many customers each should have in various individual markets. As a general rule of thumb, avoid counting on a single market segment for more than one-third of gross sales. Similarly, you don’t want to earn more than 10% of gross sales from a single customer.

For instance, if you cater to the world of professional baseball, you would want at least two-thirds of your business to come from other markets. Also, no single team or other customer type within the baseball market should account for more than 10% of gross sales. This 10% rule ensures that when you lose a major customer — and you will — it doesn’t have a catastrophic impact on your business.

Falling Into The Trap
A common maxim is that your best business opportunities are with the customers you already have. This business truth can lead to a lack of diversification, as shops get more and more orders from existing customers. It’s not that a business owner says to himself, “I’m going to stake my entire future on the whims of a single market or customer.” It’s just that getting more business from current customers is the easier path to take.

It’s also easy to be seduced by the lucrative business a single, large customer can bring you. You gradually grow your business around him, getting more and more orders for larger and larger quantities. One day you realize that he has become an 800-pound gorilla and he now dictates the terms of your business relationship.

If the gorilla wants an order tomorrow, you have to get it done tomorrow or risk losing his increasingly important business. In the meanwhile, you set aside other customers’ needs to please the big customer, putting you in a reinforcing cycle of dependence. If you find yourself in this position, sit down with the customer and say, “I think we need to re-evaluate our relationship.”

Explain that it’s in his best interests to have redundancy in his supply chain, just as it’s in your best interests to have other customers. More importantly, make sure that you’re truly earning a healthy profit from this customer. As the account grew and took over too much of your gross sales, did you gradually reduce your prices or make other concessions to keep the big customer happy? If so, you may find you have reached the point where it doesn’t make good business sense to continue. In other words, if you’ve traded profitability for volume, fix it.

What if you actually are making a good profit from this single customer? That’s great — now use that revenue to grow your customer base. Market your company, buy more equipment to increase capacity, explore new market segments. Do whatever it takes to get to a point where 90% of revenue comes from other customers.

Our shop has a rule of thumb that each year, new accounts will comprise 15% of our customer base. This is a difficult goal to attain, but striving for it forces us to push toward diversification.

Adjusting Your Mix
Assuming your shop is equipped to do so, changing minimum order size or pricing can help adjust your customer base. You might lower minimums to attract a certain type of customer that fills seasonal gaps.

With pricing, you can encourage certain customers to do more business with you by lowering prices, and discourage others by bumping up prices a bit. Raising prices can be a good strategy for customers that are simply more trouble than they’re worth, regardless of how much or how little of your customer base they represent. For instance, if you have a customer that consistently wants 25 art changes every time he orders, bump up his pricing. Either he’ll stick with you and you’ll will earn some margin on the extra art changes, or he’ll take his unprofitable orders down the road.

If you get too much business from a single customer and that account is not in the niche that provides the bulk of your work, balance things with new customers in that niche. For example, if you’re successful in the 4H youth market, try to expand into agribusiness. Look for customers who provide feed, trailers, farm-management software and so on. Leverage the fact that you already speak the language in this niche and have established relationships.

Reality Check
Our shop constantly adjusts the customer mix. We recently received news that one of our most profitable, consistent customers was closing its doors for six weeks due to sluggish sales. (Remember, getting this advance notice was a result of us keeping in constant communication with our top customers.) This information meant that we had to look for new business to make up for the impending loss.

And you know what? That’s part of business. Yes, it would be wonderful to have 50 customers, each of whom represents 2% of your business. The world would be a perfect place. But things are rarely perfect, of course. Achieving a perfect state of balance in your customer base is much like achieving balance in life: It can feel like a never-ending effort. However, it’s a struggle worth undertaking, given that, as in life, balance is critically important to the health of your business.

Greg Kitson is founder and president of Mind’s Eye Graphics in Decatur, Ind. For more information or to comment on this article, e-mail Greg at greg@mindseyeg.com or visit mindseyeg.com.

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Diversifying Your Customer Base  
Learn to evaluate and adjust your mix of clientele for optimum profitability and stability.
While the economic lows that many American markets have been experiencing for the past year are certainly painful, they’re also nothing new. Historically, the tide of business success continually ebbs and flows, with one market experiencing a rush of good fortune while another watches its revenue all but dry up. This cyclical nature of business is precisely why decorators must have a diverse customer base that allows them to weather slowdowns — or even meltdowns — in parts of the economy.
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