What is customer concentration?
Definition of customer concentration
Customer concentration, or client concentration, refers to the way in which a business’s revenue is spread across its client base.
If a significant percentage of a company’s overall revenue relies on a single customer, or a small group of customers, that business may be considered to have a high level of customer concentration. Forbes suggests that if as little as 10% of a business’s revenue can be attributed to a single client, the business could be at risk as a result.
Find out more about high customer concentration and how to address the risks it can present.
How to measure customer concentration
You can assess the customer concentration in your business by following these steps:
- Check your sales report to identify the customer who your business earned the most revenue from in the last year.
- Identify the amount of revenue that your business earned from that customer during that year.
- Divide that amount by your business’s total revenue for that year.
- Multiply that number by 100 to complete the calculation. The final number will be your customer concentration level expressed as a percentage.
For example, if you earned £1,200 in a year from Customer A (the customer who your business earned the most revenue from in that year) and your business’s total revenue for the year was £5,000, you’d calculate your business’s customer concentration level percentage as follows:
- £1,200 / £5,000 = 0.24
- 0.24 x 100 = 24%
In this example your business’s customer concentration level would be 24%.
How to keep track of your customer concentration
FreeAgent’s Radar feature can keep an eye on customer concentration for you. Radar is an area of FreeAgent that's designed to help you stay on top of your admin and become better at business. The feature uses the data in your FreeAgent account to alert you to potential issues and opportunities.
If your business has had more than two customers in the past six months, and has earned between 25% and 80% of its revenue from a single customer during that time, Radar will let you know with a handy alert.