Posted on: Wednesday, January 12, 2005

Diversify business to spread reliability

By Rhonda Abrams

I'm paranoid. Actually, in most of my life, I'm a fairly trusting person. But there's one thing that makes me totally distrustful: being overly dependent on one big customer or one sales channel. I don't want my future financial security controlled by someone else, and neither should you.

This dread of being reliant on one source of income doesn't really qualify as paranoia. Paranoia, after all is an unreasonable fear. I'm being completely reasonable. I've seen businesses collapse when their one big customer suddenly vanished.

As a consultant, when I worked with a company, one of the first things I looked at was whether they put all their income eggs in one basket. Often, they did: One customer accounted for 80 percent of their sales, one trade show or referral source accounted for 90 percent of their leads, or one distributor handled 100 percent of their accounts. I quickly helped them realize they need to diversify and helped them devise a strategy to accomplish this.

Yet a few years ago, I realized I was in the same boat. I own a publishing company and, fortunately, our books sell very well in bookstores. But we rely on one distributor to get our books on bookstore shelves. A few years ago, that one sales channel accounted for more than 90 percent of my income stream.

So imagine my paranoia when a large corporation acquired my distributor. What if they changed financial terms? If their service declined? If they stopped distributing our books? What would that mean to me? I didn't start my own business only to place my economic future in the hands of a big corporation hundreds of miles away. If I wanted that, I could have remained an employee, right?

That paranoia woke me up. I realized I needed a second sales channel. Since the other 10 percent of our income came from sales to business schools that use our books in their classes, I targeted the academic market. I hired a full-time academic marketing director, and we developed an aggressive marketing plan.

Of course, this was expensive — and risky. But it was far less risky than continuing to depend on just one source for my income.

Within two years, however, the decision to develop a second channel paid off. We've more than doubled our overall sales, and the academic market is a substantial source of our income.

It's natural to drift into becoming overly dependent on one customer or sales channel. After all, as entrepreneurs we specialize. Becoming a specialist in an area means being able to compete more effectively and charge higher prices. For a small company, it's beneficial to focus on a niche.

We also maximize profits. By concentrating our sales efforts in one channel, we substantially reduce our marketing costs.

In addition, we give great customer service. We want to make certain our one big customer is satisfied, so we devote most of our efforts to servicing that account.

Rhonda Abrams is president of The Planning Shop, publisher of books and other tools for business planning.