The mistake of getting into bed with the wrong customers

When you’re starting out, a common mistake is to become dependent on just one customer. Maybe it’s your old employer that you now freelance for, or the one gig that’s big enough to fill your diary – until they don’t need you anymore. This isn’t just a mistake made by early-stage freelancers: I met with a man yesterday who has one customer worth 500k a year, which is great. Until you realise that it’s 60% of his turnover. If this customer goes, so does his whole business.

The opposite problem is where you work with lots of different people, giving the same amount of love and attention to all of them. Except that not all customers were created equal: some customers, and some types of customer, are more profitable than others.

The 80/20 principle comes in handy here.

In this case, the 80/20 principle for customers. Here are two applications of it: 

• No single customer should ever be more than 20% of your turnover. It’s great if someone starts to spend a lot with you but make sure you invest some of the profit from this customer in marketing: get some lovely new customers to balance any over-dependence.
• It’s well worth having a look at your least profitable 20% of customers to see if they can be made more profitable – or sacked as time-wasters. 

Spending an hour going over your top customers by lifetime value, and your top products by highest total gross profit can help you get to grips with this. If those terms mean nothing to you, or if the thought of exporting a spreadsheet from your accounts package fills you with dread, get your accountant to do it for you and to make some recommendations.

Which mistakes in business have you made? Which ones do you see others making? And which ones have the biggest possible consequences?