Executive Director, Center for Excellence in Brand & Customer Management
Alok R. Saboo
Assistant Director, Center for Excellence in Brand & Customer Management
Doctoral Student in Marketing
Firms spend significant resources on customer relationships, often prioritizing those that account for large portions of their revenues. Concentrating on a few major customers results in lower relationship management efforts and higher sales, but also puts major customers in a position to demand extended trade credits, lower prices, and flexible deliveries. For instance, most suppliers dream of having Walmart as a key customer, but the same suppliers complain about Walmart’s relentless pressure for concessions that reduce the firm’s profits.
Alok Saboo, V. Kumar, and Ankit Anand investigate this contradiction in the Journal of Marketing, using initial public offering (IPO) data from around 1,000 firms that went public between 2000 and 2011. The researchers measured the impact of concentrated revenues on two different outcomes: IPO valuation and balance sheets. The results suggest that investors appreciate firms that have a concentrated customer base, increasing the firm’s market value at the time of the IPO. However, due to the high bargaining power of major customers, firms also suffer profit losses which can persist up to four years post-IPO.
What can a firm do to mitigate the adverse effects of customer concentration on profitability? Building core organizational capabilities (marketing, technological, and operational) reduces the negative effects of customer concentration on profitability. Improving such capabilities allows suppliers to anticipate future requirements and make customers more dependent on them. Firms can also forego relationships with low credit quality customers that do not offer much value and have a substantial risk of default.
For more information
Alok R. Saboo, V. Kumar, and Ankit Anand (2017) Assessing the Impact of Customer Concentration on Initial Public Offering and Balance Sheet–Based Outcomes. Journal of Marketing: November 2017