What is Revenue Concentration Risk?
Revenue Concentration Risk measures your dependence on a few customers, products, or channels for most of your revenue. High concentration means losing one customer or product could devastate your business.
Why Revenue Concentration Matters
Investors scrutinize concentration risk heavily. A SaaS company where one customer represents 40% of ARR has a single point of failure. If that customer churns, your business model breaks. Acquirers apply significant discounts to concentrated businesses.
For ecommerce founders, concentration might appear in channel dependence. If 80% of sales come from Amazon, you are one algorithm change away from disaster.
Measuring Concentration
Common thresholds: concern starts when any single customer exceeds 10% of revenue. Red flags appear above 25%. Some investors use the Herfindahl-Hirschman Index (HHI) for more sophisticated analysis.
Formula
Single Customer Concentration = Customer Revenue ÷ Total Revenue × 100
Top 5 Concentration = Top 5 Customers Revenue ÷ Total Revenue × 100
Example
Your SaaS company has $1,000,000 ARR:
- Customer A: $200,000 (20%)
- Customer B: $150,000 (15%)
- Customer C: $100,000 (10%)
- Remaining customers: $550,000 (55%)
Your top 3 customers represent 45% of revenue. If Customer A churns, you lose 20% of ARR overnight. This concentration risk will concern investors.