Customer concentration shows how much revenue depends on a few customers. Measure the share of the largest customers and what happens to the business if one leaves.
9 min read · Level 3
I think concentration should be expressed in months of runway rather than percentages. 'The top customer is 35% of revenue' sounds like a statistic; 'if they leave, we have a year of cash instead of twenty months' sounds like a decision, which is what it is.
Customer concentration measures how dependent revenue is on the largest customers.
For a company with 2,000,000 of annual revenue:
Customer Revenue Share Largest 700,000 35% Second 300,000 15% Third 200,000 10% Top three 1,200,000 60% All others 800,000 40%
If the largest customer leaves:
Revenue: 2,000,000 - 700,000 = 1,300,000, a 35% fall
What to check beyond the percentages:
Contract length and renewal dates Termination rights and notice periods Change-of-control clauses that let the customer leave if the company is sold Whether pricing for large customers is profitable How many people inside the customer rely on the product
Because concentration turns a single relationship into a company-level risk. A departure can cut revenue, damage the growth story and shorten runway at the same time.
Concentration is not always bad - many enterprise companies start with a few large customers - but it has to be known, priced and planned for.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Effect on runway if the largest customer leaves.
Monthly revenue now about 166,667 (2,000,000 / 12) Monthly costs 250,000 Monthly net burn now about 83,333 Monthly revenue without it about 108,333 (1,300,000 / 12) Monthly net burn without it about 141,667 Cash 1,700,000 Runway now about 20 months Runway without the customer about 12 months
1,700,000 / 83,333 is about 20.4 months; 1,700,000 / 141,667 is about 12.0 months. One customer's renewal decision removes about eight months of runway.
Looking only at the share of revenue without checking contract terms, renewal timing and what the loss would do to cash.
Calculate the share of the largest, top three and top ten customers.
Check terms, renewal dates, termination rights and change-of-control clauses.
Recalculate revenue, burn and runway if the largest customer leaves.
Where appropriate, confirm the relationship directly.
During diligence on any company, especially business-to-business companies with large contracts.
Do not reject every concentrated company automatically; judge the terms, relationship strength and plan to diversify.
Securities regulators generally require public companies to disclose dependence on a single customer or a few customers where the loss would have a material adverse effect, and such disclosures in filings have often preceded significant share price falls when major customers reduced orders.
Regulators treat major customer dependence as material. Private investors should too.
Create a free account to read the rest and apply it to your own investing.