Customer Concentration Ratio could Potentially Help Safeguard ARR.

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Welcome to the 53rd edition of The Growth Elements Newsletter. Every Monday, I write an essay on growth metrics & experiments and business case studies.

Today’s piece is for 5,100+ founders, operators, and leaders from businesses such as Shopify, Google, Sage, Hubspot, Zoho, RateGain, Zaggle, Servcorp, Apollo and more.

Happy Monday!

Can customer concentration ratio help safeguard ARR?

Customer Concentration is a metric that measures the percentage of a business’s overall revenue that is dependent on its top customers.

𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐂𝐮𝐬𝐭𝐨𝐦𝐞𝐫 𝐂𝐨𝐧𝐜𝐞𝐧𝐭𝐫𝐚𝐭𝐢𝐨𝐧

► You’ll need to track the following metrics:

1. Revenue from Top X Customers

2. Total Revenue

𝐇𝐲𝐩𝐨𝐭𝐡𝐞𝐭𝐢𝐜𝐚𝐥 𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐢𝐨𝐧

► Let’s say the total revenue for the month is $100,000, and the revenue generated by the top 5 customers is $60,000.

► To calculate the Customer Concentration, you would use the following formula:

Customer Concentration = ($60,000 / $100,000) x 100 = 60%

► This means that the top 5 customers generate 60% of total revenue.

𝐈𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐜𝐞

► Here is why Customer Concentration is a crucial metric for SaaS businesses:

1. Diversification

2. Plan risk mitigation

3. Derisk lower Valuation

4. Optimise customer retention

5. Safeguard profitability and scalability

𝐋𝐨𝐰 𝐂𝐮𝐬𝐭𝐨𝐦𝐞𝐫 𝐂𝐨𝐧𝐜𝐞𝐧𝐭𝐫𝐚𝐭𝐢𝐨𝐧

► Ideally, low Customer Concentration is considered 20% or less.

► This level of diversification is generally seen as a sign of a healthy SaaS business.

𝐂𝐮𝐬𝐭𝐨𝐦𝐞𝐫 𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐂𝐨𝐧𝐜𝐞𝐧𝐭𝐫𝐚𝐭𝐢𝐨𝐧

► Customer Balance Concentration refers to revenue distribution across your customer base.

► A balanced and healthy customer concentration, where revenue is evenly distributed across many customers.

𝐂𝐮𝐬𝐭𝐨𝐦𝐞𝐫 𝐂𝐨𝐧𝐜𝐞𝐧𝐭𝐫𝐚𝐭𝐢𝐨𝐧 𝐑𝐢𝐬𝐤

► Customer Concentration Risk is the potential for significant revenue/ARR loss or business disruption if one or more of the top customers were to churn or reduce their spending.

► This risk is higher when a SaaS business has a high Customer Concentration, as losing a significant customer can substantially impact the business's overall performance.

𝐎𝐩𝐭𝐢𝐦𝐢𝐬𝐞 𝐂𝐮𝐬𝐭𝐨𝐦𝐞𝐫 𝐂𝐨𝐧𝐜𝐞𝐧𝐭𝐫𝐚𝐭𝐢𝐨𝐧

► To create a more balanced customer base, consider the following strategies:

1. Expand and diversify customer segments

2. New market growth

3. Annual contracts

4. Mix of vertical and horizontal features

That's it for today's article! I hope you found this essay insightful.

Wishing you a productive week ahead!

I always appreciate you reading.

Thanks,
Chintankumar Maisuria