Roadblock #9: “Our Client Base Is Big Enough To Provide Steady Revenue” (Lesson 9)
Suppose you’ve been making steady inroads as a maker of automobile safety belts, seeing your numbers grow at a respectable clip from year-to-year, when a giant multi-national automobile manufacturer comes to you and makes you an offer you can’t refuse.
One of the 12 styles of safety belt you produce forms part of a child safety seat that comes with the automobile. Now, new parents don’t have to buy a special seat. The public can’t get enough of this innovation and you’re seeing nothing but dollar signs.
Within six months, you’ve tripled in size and are seeing a healthier, steadier revenue stream than at any other time in the history of your company. Everything seems great, as your wildest dreams for growth have been surpassed. As you stand in the middle of your plant or warehouse, you can’t believe your good fortune.
For the next five years, your multi-national partner increases their annual order by 20% and you’re able to increase the cost to outpace expense. Then you get a phone call.
The child safety seat—the one that your safety belt is part of—is under investigation for being dangerous to children. Your safety belt has nothing to do with the investigation, but the automobile manufacturer has decided to cease production of the seat. You’re told that even if the investigation comes up clean, too much bad PR has made the feature a liability, so they are abandoning that program.
You can’t get another automobile manufacturer to get on board because nobody wants to be associated with that kind of safety seat technology. You stopped making 10 of the 12 styles of belt because you decided it wasn’t cost effective compared to what your client was paying you for that one kind. Truth is, you’re not even sure if those other styles are still relevant because you haven’t been paying a lot of attention to the market over the last half-decade.
That automobile manufacturer made up 96% of your revenue. Two of your original clients, who were the other 4% you kept more out of loyalty because they once made up 80% of your business, are the only ones left. They now make up 100% of your business.
Things are about to get very difficult.
Many Eggs In One Basket
Did you do anything wrong by taking that giant contract? Of course not. It’s the kind of thing most organisations dream about. If your game plan was to get a big client, ride it as long as you could and then cash out, mission accomplished. That’s a legitimate strategy and it worked for you.
However, if your plan was to continue operation of the company at the size it was long into the future, you fell victim to putting all your eggs into one basket. You took your eye off the ball of building and diversifying your business because you got comfortable. The thing that helped land you the big client is the thing you abandoned once they were yours.
What happens the day after that phone call? You’re not going to keep the machines running. If the machines aren’t running, you don’t need the people to operate them. If you don’t have those people, you don’t need the people to manage them. It’s a domino effect and your organisation must be gutted to survive even as a tiny shell of what it once was.
The “reliance issue” isn’t restricted to your biggest client bailing on you. What happens if you purchase a specific kind of pin for the safety belt from a manufacturer in Asia and they go out of business?
What happens if you now have to pay 10 times the amount for new pins from Europe? Are you able to pass on the increase to the automobile manufacturer? If not, how are you going to make up the difference?
You can control much of what happens in your business, but you’re always going to have suppliers and clients that you are dependent upon. If you’re too dependent on them and something happens with their business, it could theoretically take your business down with it.