10 customers contributes $630 million (as opposed to straight-lined $70 million) to Company B’s coffers. Revenue is not distributed equally per customer, so if one of these customers were to leave, the company would be drastically compromised. This is indeed a cautionary tale!
By the way, these are real companies. Company A is Starbucks, and Company B is Celestica, a Canadian supply chain services outsourcer. Exhibit 2-1 summarizes their respective revenue concentrations.
Exhibit 2-1: Revenue Concentration, Starbucks vs. Celestica
Starbucks and Celestica are not outliers. Exhibit 2-2 shows the revenue concentrations of a select group of other well-known B2C and B2B firms. In total, the B2C companies in this analysis derive $620 in revenue per customer, while the B2B companies derive almost $8.7 million in revenue per customer! It’s also worth noting that the Pareto Principle holds true for the B2B companies listed: the top 20 percent of their customers generate more than 80 percent of their total sales.
Exhibit 2-2: Selected Revenue Concentrations, B2C vs. B2B
What does this concentration of revenue mean for a B2B company? Imagine Celestica losing two of its top 10 customers. Their loss of just these two top customers would result in a devastating 15 to 30 percent decline in annual revenue. Since many B2B companies have multi-year contracts with their customers, there would be a compounding effect year-over-year that would increase the decline. Conversely, Starbucks probably wouldn’t know if it lost 1,000 of its top customers. In fact, no matter how many venti, nonfat, cinnamon-sprinkled, decaf lattes Starbucks’ top 1,000 customers buy, if they all decided to switch to McDonald’s McLattes, it wouldn’t dent the company’s revenues.
A few years ago when Tom Webster took over as CEO at Intesource, a B2B provider of spend management solutions based in Phoenix, Arizona, he discovered that 80 percent of the company’s revenue came from just six customers. “The fact that only 6 customers controlled our fate was a major issue we needed to immediately address,” Webster recalls. “Now we’ve got 12 customers who make up 80 percent of our revenue, which provides a much more sound and secure spread of revenue risk. But the reality of our business will always be that very few customers play a significant role in the health of our company.” Even for $3.3 billion India-based HCL, more than 80 percent of their revenue comes from less than 100 accounts.
High revenue concentrations are a harsh reality in B2B, regardless of a company’s size. Further, when the fate of a B2B lies in the hands of just a few customers, the power of these customers is enormous. “Once we realized that we only needed to secure a few dozen large customers in order to dominate our market, it changed the game for us,” says Richard Hearn, the CEO of Crown Partners, a Midwestern provider of eBusiness solutions with $20 million in annual revenues. “Coming from a Procter & Gamble background, it was a complete mind-shift for me and other members of the leadership team.”
What if your B2B company lost two of its top 10 accounts in the coming months? What would the impact be on the top line, bottom line, economies of scale, and the headcount and morale of your company? Would your company be able to recover from the loss, let alone fund growth and meet the expectations of its owners?
Reality #2: The Fate of a B2B Company Rests in the Hands of Just a Few People
If you are starting to feel a little claustrophobic, prepare to have your world shrink even further. In the B2B world purchasing decisions are made by just a few people. That’s right, unlike in the B2C world, it’s just a few people in a small number of customer companies that control a B2B company’s destiny. Do you know who these people are in your customer companies? If so, how well is your company connected to them?
B2B Sales Involve Multiple Players
When I buy a song on iTunes, I play multiple roles:
I’m the end user: I listen to songs I download to my iPod.
I’m an influencer: I like the music of Dave Matthews and tell myself I’d enjoy hearing his band’s latest release whenever I want.
I’m my own purchasing agent: I decide that I’m willing to pay 99 cents for a new song, but not $1.49.
And I’m the decision maker: I click the buy button.
Because I play all these roles as a consumer, it’s not very hard for B2C companies to figure out how to market to me and others with a similar demographic, preference, buying habit, etc.
For B2B companies, on the other hand, these same four roles—end user, influencer, purchasing agent, and decision maker—are usually played by many different people. This creates complexity and confusion as companies try to focus their sales and marketing efforts. Exhibit 2-3 illustrates the number of people involved in an average purchase from four companies: Oracle; Crown Partners; restaurant equipment manufacturer Henny Penny; and information services provider Lexis-Nexis. For instance, the average customer for LexisNexis’s legal research service is a mid-size law firm. Thus, there are 300 end users of the service, seven influencers (usually librarians and members of the technology or executive committee of the firm), one purchasing agent, and one decision maker (usually the firm’s senior partner).
Exhibit 2-3: Four Roles, Multiple Players in Each Customer
All these players are not equal in importance to a B2B seller, and, as I describe in the following pages, each provides a different level of input to the buying decision (see Exhibit 2-4).
Exhibit 2-4: Levels of Customer Input
The end users of your software, medical diagnostic equipment, or jet engines are important, of course, but they are not as important as conventional wisdom suggests. There may be thousands of them or more, but they can’t renew the sales contract, upgrade to a more expensive solution, or decide to switch to a competitor. Neither can purchasing agents, unless you are selling a commodity, or you find yourself competing solely on price (and if that’s the case, you probably need to add value to your offerings, and change your sales approach). Purchasing agents set standards and practices for purchasing and manage the procurement process, but they are not ultimately responsible for the decision to buy.
Influencers are involved in the buying decision by evaluating which solutions will best fulfill their companies’ needs. Influencers also evaluate providers. They seek to discover if a B2B seller can do what it claims and whether it can work effectively with the customer company. Sometimes this process of evaluation and selection is straightforward. Typically, however, as the complexity of the solutions increases and they cut across organizational boundaries within the customer’s company, so does the number of influencers involved in the sale. In fact, there may be dozens of these folks at any single customer firm and a B2B company needs to satisfy all of them.
Finally and ultimately, there are the decision makers. Usually residing near or at the top of the organizational hierarchy, these are the people who have the final vote; they decide to do the deal. They hear the recommendations of purchasing
