Guide
4 min read
By MSP Margin Editorial
Most MSPs grow by winning a few good clients early and serving them well for years. That is a healthy way to build a business, but it often leaves one or two accounts carrying a large share of revenue. Customer concentration is the measure of how much of your income depends on a small number of clients, and it is one of the first things an outside reader of your financials will calculate.
Two numbers worth tracking every quarter
The two standard measures are simple. Top-client share is the revenue from your single largest client divided by total revenue. Top-five share is the combined revenue of your five largest clients divided by total revenue.
A few choices make the numbers more useful:
- Use a trailing twelve months, not a single month. One large project invoice can distort a monthly view.
- Group related entities. If three clients share an owner or a parent company, treat them as one customer. A buyer will.
- Calculate it twice: once on total revenue and once on recurring revenue only. Project work tends to come from your largest clients, so the recurring view is often lower and tells a different story.
- If you can, run it on gross profit as well. A large client on thin margins matters less to profit than its revenue share suggests, and a small client on rich margins matters more.
Here is an illustrative example with round numbers. An MSP has $2,000,000 in trailing twelve-month revenue. Its five largest clients look like this:
| Client | Annual revenue | Share of total |
|---|---|---|
| Client A | $400,000 | 20% |
| Client B | $250,000 | 12.5% |
| Client C | $200,000 | 10% |
| Client D | $150,000 | 7.5% |
| Client E | $100,000 | 5% |
| Top five combined | $1,100,000 | 55% |
Top-client share is 20 percent and top-five share is 55 percent. Losing Client A alone would remove a fifth of revenue, and because labor and tool costs do not fall at the same speed, the hit to profit would be larger than a fifth.
Why lenders and buyers care
A lender is asking whether your cash flow will keep covering loan payments. If one client produces a large slice of that cash flow, the loan depends on that client staying, and the lender has no relationship with them. Expect questions about the client's contract term, how long you have served them, and who the decision maker is.
A buyer is asking whether the revenue will survive the sale. Large clients often have a personal relationship with the founder, and that relationship is exactly what changes at closing. Concentration therefore tends to show up in deal terms: more of the price held back, paid over time, or tied to the client staying. It can also narrow the pool of interested buyers.
Concentration is not automatically a deal problem. A large client under a long agreement, with several contacts at your firm and a history of renewals, reads very differently from a large client on a month-to-month arrangement who calls the owner's cell phone. The number starts the conversation, and your documentation finishes it.
Reducing concentration without losing the client
The goal is almost never to shrink your biggest account. It is to grow everything else so that the account becomes a smaller share of a larger business. In the example above, if the MSP adds $500,000 of new revenue from other clients while Client A stays flat, Client A drops from 20 percent to 16 percent ($400,000 divided by $2,500,000).
Practical steps that help over time:
- Point sales effort at clients in your middle size band. Five new mid-size clients do more for concentration than one new large one.
- Move large clients onto written agreements with defined terms and renewal dates, so the revenue is easier to underwrite.
- Build relationships below the owner. Make sure a service manager and a technician lead are known to each large client and that the client knows them by name.
- Be careful with pricing concessions. Discounts given to keep a big client happy lower your margin and leave the concentration in place.
- Separate project revenue from recurring revenue in your books so you can show that a large client's spending is stable, not lumpy.
- Report concentration internally each quarter so the trend is visible before anyone outside asks for it.
These changes take years, not months, which is why it pays to start measuring well before a loan application or a sale.
This guide is general information, not financial, legal or tax advice for your situation. Before acting on it, work with your CPA, attorney and other advisors who know your business and agreements.