Many of the contract cleaning companies I work with have managed to do very well having a few large contracts for many years. Others have also done well, but their focus has been on having a large number of medium-size customers or a mixture of both.
Which business approach is best?
There is no easy answer, as there are benefits to both scenarios that we need to consider. Let’s start with the benefits of just having large clients and compare that with the alternative.
Reasons to Just Have a Few Large Clients
When contractors have a few large clients, they can pay much closer attention to those clients. Their focus is on keeping these clients happy. This is one reason big clients tend to stick around for a more extended period.
Additionally, the contractor may not require as large a sales force or put as much time, energy, and resources into marketing.
When these companies do market for new customers, they can reference these large, longtime clients. Both the size of these companies and the length of time the contractor has been servicing them are feathers in their caps.
Further, having a few large clients often stabilizes cash flow, a big concern with any cleaning contractor. Most large companies pay their vendors about the same time every month, allowing the contractor to budget accordingly.
Reasons to Have Many Medium-Size Clients
The significant advantage of having many medium-size clients is that if you lose a one, it does not cause a serious disruption in your cash flow. Other clients often can fill in the gaps.
Further, when it comes to replacing that customer, we have to view what I call the “client landscape” as if it were a mountain. At the top of the mountain are just a few large potential customers with many companies competing for their business. But as you walk down the mountain, you find many smaller, medium-size potential customers. What this means is that your chance of earning a new medium-size client is much greater if just because there are so many more of them.
Which Is Best?
Possibly the following study will give us some insight. A study released in 2017 analyzed how well companies did when they sold stock and went public. Those companies that had a few large clients received higher prices for their stock. Investors believed that having a few, but very large customers reduced uncertainty. They were more willing to invest in these companies and invest more money in them.
But further down the road, some of the companies that had their earnings concentrated in a few large customers lost those customers. Their earnings dropped, as did their profits, making this a loss for the investors.
When this was compared to companies that had many customers of various sizes, large and medium-size, the companies with a diversified client base were more stable over time. The researchers concluded that the investors would likely have realized better returns if they had invested in these companies.
In sum, the study suggests businesses that work to expand their client base and have a mixture of large and medium-size customers do better over time.
Ron Segura helps cleaning contractors grow. He has over 45 years of experience in all segments of the professional cleaning industry including ten years as Manager of Janitorial Operations for Walt Disney Pictures and Television. To contact him, call 650-315-8933.
Alok R. Saboo et.al, “Assessing the Impact of Customer Concentration on Initial Public Offering and Balance Sheet-Based Outcomes,” Journal of Marketing, November 1, 2017.
