Every year, I look at how much money I earn from each client. Some years, my earnings are very skewed toward one client (or two). If something had happened to that working relationship, my year could have looked much different.
Before I became a solopreneur, I worked in banking and then at a tech company. We had a phrase for reliance on a few clients: concentration risk.
Companies that have this type of risk have a whole system for tracking it, and often try to find ways to reduce the risk, usually by taking on more clients. That’s not always an option for a solopreneur without the ability to scale work. We have the same type of risk—lose one client, lose a large portion of income—but not the same means of managing it.
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Start with the percentage
Accounting standards require a public company to disclose any single customer that accounts for 10 percent or more of its revenue, so shareholders can see when that much of the business is tied to a single relationship. But those companies have hundreds, if not thousands, of customers. A solo business with four clients faces a risk of losing 25% of its revenue if a single client leaves.
Knowing the percentage is the first step. If you don’t know off the top of your head because you work with many clients, look at a financial statement from your accountant or accounting software. Look at last year and compare it to prior years.
For you, the breakdown might be by client or by revenue stream—wherever you feel like you have the most risk if something drastically changes.
Client dependency comes at a cost
The risk shows up in how you run your business long before a client ever leaves. If you know you’re dependent on one of your clients, you might hold your rates instead of raising them to keep the client happy. You might also absorb scope creep when the client requests something additional. You find yourself rearranging your week to respond to changes in the client’s calendar, rather than protecting your time.
That’s always the risk with client dependency: you’re letting the client’s needs dictate parts of your business.
There’s another type of exposure if a single client is your only work. The Department of Labor looks at economic dependence when deciding whether someone is an employee or an independent contractor. If the Department of Labor determines that you are functionally an employee, it has tax and benefits implications (mostly for the employer, though you need to be aware of it also).
Reducing your client concentration risk
Many solopreneurs choose to work with only a few clients at a time. The work is deeper and there’s less context switching between clients. At one point, working for an employer, I was responsible for managing more than 40 client accounts. I’m much happier with only a few.
While working with only a few clients at a time is a viable business model, you should always plan for the impact of losing a client. That way, it doesn’t derail your business.
Always market yourself. Replacing a client can take weeks, sometimes months. You need to keep your pipeline active even while you’re busy, so you have options when a spot opens up on your client roster.
Look at your business model. Project-based and ad hoc work spreads revenue across more clients than one large retainer does. In addition to a few anchor clients, I take on a lot of smaller projects from clients to reduce my dependency.
Give yourself a financial cushion. Solo income is uneven month to month anyway, so let the high months fund your low ones. Set aside money when you can, so that if you lose one big client, you can tie yourself over until you find a new one.
You can also write a notice period into your contracts. If a client has to give you a 30-day notice before ending the agreement, you have time to prepare for the change in your income.
Knowing your number
A client who is responsible for a large share of your revenue isn’t necessarily a problem. It’s worth looking at the number, though, and thinking through a few “what-if” scenarios. What would you do if that client emailed tomorrow and gave notice? What would your next steps be?
If you have answers in mind, the concentration risk matters much less.
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