Customer concentration

The share of a business's revenue that comes from its largest few customers.

Example

Three customers accounting for 2,520,000 of 4,200,000 in revenue is 60.0% of the business in three relationships.

Important

It is a property of the business being bought, unlike concentration risk, which is a property of your own portfolio. A customer count says nothing about it; only the revenue beside each name does.

Related terms

• Concentration risk — The risk that a large share of your wealth depends on a single outcome - one company, sector, property, currency, employer or counterparty.
• Red flag — An observation with two plausible explanations, one ordinary and one serious, which the observation alone cannot tell apart.
• Change-of-control clause — A contract term letting the counterparty terminate, renegotiate or withhold consent when the ownership of the other party changes.

Lessons that explain it

• If one customer can leave, measure what leaves with them — 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)
• Red flags: the signals that mean slow down — A red flag is not a reason to stop. It is a reason to stop moving at the speed you were moving, and to go and find out which of two explanations is the true one. (11 min)
• The most important line in an update is often the one that is missing — Founders naturally lead with good news. Reading an update well means comparing it with last period, noticing which figures disappeared and separating real warning signs from normal early-stage noise. (11 min)
• In fintech, regulation, partners and losses matter as much as the product — Financial technology companies depend on licences or partner banks, earn thin margins on large volumes, and can face fraud and credit losses that do not appear until later. Evaluating them means looking beyond growth to compliance and loss rates. (11 min)
• The multiple is a discount for size, concentration and dependence on one person — There is no exchange setting a price here. The multiple applied to SDE is a negotiated number that moves with customer concentration, revenue durability and how replaceable the owner is - and it sits far below public-market multiples for reasons that have nothing to do with the quality of the business. (11 min)
• Appraising one business: verify the earnings before you price anything else — Seven checks on one specific listing, in an order that puts verifying the earnings ahead of everything the earnings are used to justify - because every other number in the deal is built on top of a figure the seller had every reason to shape. (13 min)

All 578 terms in the Investing glossary