Written by Bella I.
Within the logistics industry, and particularly for freight brokers or third-party logistics companies, having a high customer concentration can pose major risks to a company’s overall growth rate and revenue. Essentially, customer concentration is a measure of the distribution of revenue within a company’s customer base. While this can yield large amounts of consistent revenue, a small mishap, a change in the economy, or decrease in frequency or size of shipments can result in significant losses for the company. In simple terms, you’re putting all your eggs in one basket, and though you may profit at a rapid rate initially, potential for total loss and risk of loss increases the larger the percentage of the customer base that any individual customer occupies. So, this begs the question, how do we reduce the risk and maintain relationships with our larger customers? The most critical thing a company can do is maintain the relationships; within the logistics industry this means always making sure that the customers shipments are pushed through on time and with no damage. It also means delivering analytics and reports so that the customer knows what to expect for their shipping in the future.
A common argument in favor of higher customer concentration becomes quality versus quantity; this same concept is transferrable to the company, in that they must give their most highly concentrated customers the highest standard of quality. This can become tricky to balance because if all your efforts are going into a few customers then others may feel neglected, in logistics it is always important to offer a high quality service to everyone. Maintenance of customers and the assets which they hold is essential to prevent downward pricing pressure from the customer, which would in turn negatively impact revenue potential. In determining the distribution within an investment portfolio, having one or several key customers can allow for individualized time and customer-specific approaches, which is essential for keeping the customer.
In summary, high customer concentration can prove to be both advantageous and disadvantageous to the overall success and margins of a company. However, avoidance of pitfalls often associated with higher customer concentrations is founded on building and maintaining positive, mutualistic relationships between customer and company. Ultimately, choosing to have high or low customer concentration is entirely a personal decision, and should be tailored to meet the specific investment and financial decisions of the company.