A new study finds evidence to support the idea of 'less is more'. Here's why scaling your company with fewer clients may just contribute to your company's long-term health.
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?
So 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, technology-based firms operating in business-to-business markets in the UK, and asked: How does dependence on a key customer impact the firm's customer portfolio 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 portfolio growth."
Here's a look at the factors that help young companies scale with just a couple of clients—and how your firm can leverage some these ideas to grow.
Who your clients are matters. One of the main factors of growing your company with just one or two clients are who those clients are. 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.'"
On the flip-side, having a key customer that's second-tier may stymie growth, Yli-Renko says. "It's not a one-size-all kind of a approach."
Good clients act as great referrers—and your evangelists. Devesh Dwivedi, an Indian immigrant who founded a small Web development company five years ago in New Jersey, illustrates a perfect example of how this strategy works. By focusing on one relationship he formed with one of his first clients, a large IT company, Dwivedi's business prospered.
"They ended up being a big evangelist for me,” he says. "They would hire us for every project we had, but the reason I use the word "evangelist" is because they personally introduced me to each one of their business contacts. Once I had worked for them for a while, they began to make personal introductions to other clients."
The client also became a mentor to Dwivedi—someone within the industry that helped Dwivedi strategize about new product offerings, and how to best position his company.
"He would sit down with me and tell me what's right, what's wrong, what people would like, what people would not like, and helped me grow my business that way," he says.
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. Some small business experts are hesitant to accept the credo that having fewer customers is healthy way to grow a business. And their logic is reasonable: lose that client, and your company may go out of business.
Denise O'Berry, a small business consultant based 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 those key 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."
Russ Lombardo, president of Cary, North Carolina-based PEAK Sales consulting, agrees. "Focusing on one or two clients can be really dangerous," he says. "If I were advising a young company, and I knew they only had one big client, to me, that would sound really risky. They could lose that client, which could easily happen for a variety of reasons—like the company deciding to do the project in-house or going overseas."
An experienced manager is crucial. To mitigate those risks, Yli-Renko says the company's experience in managing relationships is absolutely essential. A veteran manager will understand how to control the relationship between the client by building trust, she says, while an inexperienced entrepreneur may jeopardize the relationship by demanding new contracts.
"The tendency for entrepreneurs is—as dependence increases—to get worried and become more reliant on contracts in the relationship," she says. "That actually is the wrong thing to do based on our research. Of course it's important to have basic contracts in place, but as dependence increases, what entrepreneurs should be doing is fostering the relations and trust-based aspects of the customer relationship."
In practice, that means an increased flexibility of deliverables, a commitment to quality, and a willingness to satisfy the client above-and-beyond expectations. "If the customer requests things that are outside of the contract, the more experienced management will do all they can to be accommodating, rather than sticking to the letter of the contract or constantly try to renegotiate," she says.
Know when to expand. Eventually, even if your company does rely on one or two big clients, you'll want to expand. But at what point does that become prudent?
"The question is, "When do you start feeling the pain?" says Russ Lombardo. "When does it getting to a 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."
The end-goal, of course, is to scale the company to multiple clients. But according to Yli-Renko, it could take years before the start-up is ready to leave the original client behind to start cultivating new customers.
"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."
More from Inc.com: