Helena Yli-Renko, an assistant professor of clinical entrepreneurship at USC’s Marshall School of Business, was working on her Ph.D in Finland in the late 1990’s when she began to observe a novel trend among Finnish telecommunications start-ups: rather than seeking out multiple customers to grow their companies, the companies all seemed to be clamoring to strike deals with Nokia, an industry leader. At the same time, the young companies were apprehensive about their growth strategies: “They were worried about putting all their eggs in one basket,” she says.
And rightfully so. Why put it all on the line for one big client—no matter how big they are?
Over the next six years, Yli-Renko set out to determine if those fears were justified. With Dr. Ramkumar Janakiraman, a management professor at Texas A&M, Yli-Renko surveyed 180 young firms operating in business-to-business, and asked: How does dependence on a key customer impact the firm’s customer growth?
Defying conventional wisdom, the researchers found that young companies that rely on one or two big clients were more successful than companies that didn’t. In her words, “What we found was that key customer dependence actually had a positive effect on the firm’s customer growth.”
Following are the factors that help young companies scale with just a couple of clients—and how your firm can leverage them for growth.
Who your clients are matters. If your one key customer is someone like Apple or GM—industry leaders that are well-recognized and well-respected—you’re going to get positive reputation effects from that relationship.
“That instantly creates legitimacy for that young firm,” says Yli-Renko. “Other firms may says, ‘If GM uses these guys, we can too.'”
Good clients act as great referrers—and your evangelists. By focusing on a single client relationship, Devesh Dwivedi, founder of a Web development company in New Jersey, has grown his business.
“They would hire us for every project they had, but the reason I use the word “evangelist” is because they personally introduced me to each one of their business contacts,” says Dwivedi.
The client also became a mentor to Dwivedi, helping him strategize on new product offerings, and how to best position his company.
Yli-Renko says this type of ‘evangelism’ was pervasive among her study. Going to an industry trade show, for example, with a client like GM will open doors for future connections. “It’s about building personal networks,” she says.
Find the perfect balance. Denise O’Berry, a small business consultant based in Tampa, Florida, says the company should look at their bottom line to determine if they’re too dependent: If more than 50 percent of the company’s revenue comes from one client, it’s time to move on to new prospects.
“The sexiness of the steady client has quite an allure to it, especially for start-up companies,” she says. “But they need to divide their time between making clients happy, and not totally stop trying to do customer acquisition, mainly because of the risks. They need to have a process in place for business development in addition to satisfying their current clients.”
Know when to expand. Eventually, even if your company does rely on one or two big clients, you’ll want to expand.
According to Russ Lombardo, president of Cary, North Carolina-based PEAK Sales consulting, “When it gets to the point where a customer says ‘I want a demo,’ and you have to say, ‘Sorry, we’ll have to schedule it two weeks from now.’ That’s when you know you need more resources—or fewer leads.”
Yli-Renko concluded; “The basic idea in the research is that if you can sell as much to one large customer as you can sell to 10 smaller customers, you’re going to be more efficient,” she says. “You’re also going to free up marketing dollars and management time that will then enable you to pursue other customers and grow your firm.”
From a previous post by Eric Markowitz, via Inc, who reports on start-ups, entrepreneurs, and issues that affect small businesses. Previously, he worked at Vanity Fair. He lives in New York City. @EricMarkowitz