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Discover how customer concentration is measured through ratio and index methods to assess revenue dependency and risk exposure.
Customer concentration assesses the proportion of total revenue that comes from key customers. The ratio and index help businesses understand their revenue dependency and exposure to client-specific risks. Tracking this measure helps maintain a balanced revenue distribution.
Customer concentration measures how much of a company’s total revenue comes from its major customers. It highlights dependence on a limited set of clients and helps determine how vulnerable a business is to revenue loss if any major customer stops buying.
A high concentration suggests that a few clients contribute heavily to total sales, exposing the firm to greater financial and operational risk. A low concentration, on the other hand, reflects diversification — a more balanced distribution of revenue across customers.
Example:
If 60% of a company’s sales come from just three clients, it reflects high customer concentration. Losing one of them could significantly affect cash flow and profitability.
Why it matters:
Reveals dependency on key customers.
Influences valuation, creditworthiness, and pricing strategy.
Guides diversification and risk mitigation efforts.
The Customer Concentration Ratio quantifies the share of total sales generated by major customers. It’s a straightforward way to measure revenue dependency.
Formula:
Customer Concentration Ratio = (Revenue from Major N Customers ÷ Total Revenue) × 100
Example:
If your top five customers generate ₹40 crore out of a total ₹100 crore in sales:
Customer Concentration Ratio = (40 ÷ 100) × 100 = 40%
Interpretation:
Above 50%: High risk — indicates high dependency on a few clients.
30–50%: Moderate risk — manageable but should be monitored.
Below 30%: Healthy diversification and stable revenue mix.
When calculating the ratio, exclude one-time or seasonal buyers that can distort the analysis. For instance, a temporary bulk order from one customer might spike concentration for a short period but not reflect the true long-term dependency.
Segmenting data by product line or region can help produce more accurate insights.
While ratios provide a snapshot, indices offer a more nuanced measurement of concentration by considering both the number of customers and their relative share of revenue.
The most commonly used indices are:
Herfindahl–Hirschman Index (HHI)
Gini Coefficient
Consider the following table:
| Metric | Focus | Detail Level | Use Case |
|---|---|---|---|
Ratio |
Major customers only |
Simple |
Quick financial health check |
Index |
All customers |
Detailed |
Strategic and regulatory analysis |
Indices help capture smaller client dependencies that the ratio might miss, giving a fuller picture of diversification.
Herfindahl–Hirschman Index (HHI)
HHI = (S₁² + S₂² + S₃² + … + Sₙ²)
where S represents each customer’s percentage share of total sales.
Closer to 1 (or 10,000) = High concentration
Closer to 0 = Greater diversification
Gini Coefficient (for revenue distribution)
Measures inequality among customer contributions.
0 = Perfect equality (all customers contribute equally)
1 = Perfect inequality (one customer dominates revenue)
Example:
If 80% of your revenue comes from 20% of customers, both HHI and Gini will show high concentration.
High customer concentration presents both risks and opportunities:
Revenue loss if a key customer defects or reduces orders.
Lower bargaining power in pricing and contract terms.
Difficulty securing loans or favorable credit ratings.
Stronger relationships with key clients can lead to recurring business.
Easier forecasting and streamlined account management.
Potential for premium pricing if offering niche or specialised solutions.
Balanced approach:
Businesses should maintain strong relationships while steadily expanding and diversifying the customer base to reduce single-client dependence.
Typical concentration levels vary across industries:
| Industry | Safe Threshold | Risky Threshold | Notes |
|---|---|---|---|
Manufacturing / B2B |
≤ 30% |
> 50% |
Often rely on long-term bulk contracts |
IT & SaaS |
≤ 25% |
> 40% |
Subscription models can offset high concentration |
Retail / D2C |
≤ 20% |
> 35% |
Broader customer base reduces exposure |
Automotive / OEMs |
≤ 35% |
> 60% |
High dependency on few strategic buyers |
Export Firms |
≤ 30% |
> 50% |
Regional diversification is key |
These benchmarks serve as a general guide; each company must interpret ratios in line with its business model and industry context.
The Customer Concentration Ratio and Index provide a vital measure of business stability and risk exposure. They reveal how reliant a company is on a few customers and help in diversification strategies.
Key takeaways:
A ratio above 50% indicates high dependency and potential vulnerability.
Indices like HHI offer deeper insights into distribution across all customers.
Regular tracking prevents over-reliance and improves financial predictability.
Diversification strengthens valuation, credit standing, and growth resilience.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Ratios measure customer concentration by focusing on revenue share from the major few clients, whereas indexes such as the Herfindahl–Hirschman Index (HHI) evaluate the entire customer base. Indexes provide a more comprehensive view of revenue distribution and overall dependency risk.
Business-to-business (B2B) firms often have higher customer concentration because a significant share of their revenue comes from a small number of large clients. In contrast, business-to-consumer (B2C) companies typically serve a broader customer base, resulting in lower individual client impact.
High customer concentration indicates that a large portion of a company’s revenue depends on a limited number of clients. This reliance increases financial and operational risk if one or more of these clients reduce orders, delay payments, or end their relationship.
Businesses can reduce customer concentration by diversifying their client portfolio, expanding into new geographic markets, developing multiple sales channels, and introducing new product or service categories to attract a wider range of customers.
Customer concentration should be reviewed mainly on a quarterly basis. Frequent assessments help identify changing revenue patterns, especially in industries affected by seasonality or contract-based sales cycles.
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Posted on 19 Dec
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