by Michael Griffith, Manufacturing Technology Engineer, NWIRC
Manufacturers in northwestern Pennsylvania collectively provide products, parts and services to a wide range of industries including transportation, oil & gas, mining, industrial machinery, automotive parts, electronics, aerospace & defense, medical, rubber & synthetic fibers, and consumer products to name a few. Best practices not only suggest that manufacturers should not concentrate more than 10% of sales with any one customer or 25% of sales with five customers, but also to diversify sales across multiple industries. Such high customer concentration significantly increases risk of lost revenues (either to competitors or during economic downturns in the major industry served), increases lending costs, and lowers the perceived value of the business. Manufacturers who find themselves with high customer concentration should immediately look to diversify their customer base utilizing a five-step process:
1. Assess your business and your customers
The most common tools for assessing your business and current customers are a SWOT Analysis and an Ideal Customer Profile. The SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis considers the value you provide your customers now and in the future, and answers the questions, Why do customers buy from us? and How can we improve the value we offer?
An Ideal Customer Profile defines who your best customers are in specific terms such as industry code, products or services sold, geographic location, number of employees, annual sales, markets served, level of technology employed, etc. Defining your best customers in specific terms helps to narrow focus as you seek out new customers.
2. Conduct a competitive assessment
An analysis of your competitors not only helps to assess how your products and services compare to your competitors’ offerings, but also offers insight into what customers may be seeking that you are not currently providing. Essentially, a competitive assessment helps to answer, why do customers buy from competitors instead of us?
3. Research potential markets
Diversifying your customer base into new markets may require broadening your reach into as many new markets as possible, some of which may be better suited than others. Market research on potential markets can help assess which markets are growing and which are declining, which markets are saturated with suppliers and which provide opportunities for new entrants, where customers are concentrated, and what factors affect market trends.
4. Develop a new business growth plan
Armed with intelligence about your business’s value, ideal customer profile, competitive landscape and potential new markets, you can develop a new business growth plan. The new business growth plan details who to contact, how to reach out to prospective customers, and what to say to quickly qualify need and fit for a new business relationship.
5. Conduct new business development activities
New business development activities include identifying specific companies and contacts to target and conducting outreach in accordance with the developed plan.
Following these lead generation and business development steps can help a manufacturer strategically reduce customer concentration, minimize risks to economic downturns, and grow its business through new customer opportunities. To learn more about resources available to help diversify your customer base, contact your NWIRC Business Advisor.
Michael Griffith is a Manufacturing Technology Engineer at NWIRC. Over the years, he’s held various positions within manufacturing and received both his bachelors in Chemical Engineering and Masters of Business Administration from Penn State University.