Customer Concentration

What Is Customer Concentration?

Customer concentration is when a large share of a company’s revenue depends on a small number of customers. High customer concentration creates financial risk if those customers reduce their spend or leave altogether.

Companies try to limit customer concentration risk because too much reliance on a small number of customers can make a business vulnerable to a significant loss of revenue and its impact on cash flow. 

How to Measure Customer Concentration Risk

Customer concentration is measured by determining how much of a company’s revenue comes from a few customers. 

For example, many businesses look at the share of revenue from their top 5 customers:

• Low concentration: Top 5 customers account for less than 25% of total revenue.
• High concentration: Top 5 customers account for more than 50% of total revenue.

How to Calculate Customer Concentration Risk

The simplest method is to calculate the percentage of total revenue that comes from a company’s largest customer.

Formula

Customer Concentration (%) = Revenue Contribution / Total Revenue

Example

• Total Revenue = $100 million
• Customer A = $25 million
• Customer B = $15 million

Customer A Concentration = 25 / 100 × 100 = 25%
Customer B Concentration = 15 / 100 × 100 = 15%

Together, customers A and B generated 40% of revenue.

What Is an Example of Customer Concentration Risk?

According to Nvidia’s SEC filing for Q2 2025, two unnamed customers accounted for 39% of total revenue. Nvidia described them as direct customers, or companies that buy its graphics processing units (GPUs) and integrate them into systems or boards for end users.

It’s worth noting that Nvidia’s situation is somewhat unique:

• Demand for AI GPUs is so strong that customers are competing for supply.
• Nvidia maintains a strong technological edge, which gives it bargaining power even with large clients.
• Long-term AI infrastructure spending projections suggest that revenue opportunities remain very large, even if customer concentration continues.

Even if the trends above remain positive, it’s worth noting the risk factors associated with Nvidia’s high customer concentration in the long term.

• Revenue exposure: If one major customer leaves, reduces orders, or goes out of business, it can significantly harm revenue and cash flow.
• Reduced bargaining power: Customers that account for a large share of revenue often have leverage to negotiate lower prices, better terms, or more favorable contracts.
• Investor and Analyst Concerns: Markets often view high customer concentration as a warning sign. Even when Nvidia’s growth story is strong, analysts might flag the lack of visibility into cloud customers’ long-term spending plans, making revenue forecasting less reliable.

Nvidia illustrates how customer concentration can magnify both risk and reward. The company currently benefits from large customers. But the same concentration exposes it to financial, strategic, and operational risks if those customers pull back or shift strategy.

How Can Companies Lower Customer Concentration Risk?

Businesses can take several steps to manage or reduce customer concentration risk. The goal is to avoid overdependence on a small number of customers and create a more stable revenue base.

1. Diversify the Customer Base

The most direct approach is to expand into new markets or industries, so revenue is less concentrated in a handful of clients. For example:

• Targeting small and mid-sized businesses if most revenue currently comes from a few large enterprises.
• Expanding geographically, such as moving into new regions or countries.

2. Developing New Products or Services

By broadening the product or service portfolio, companies can attract different types of customers. This strategy can diversify revenue by increasing sales from existing clients who purchase additional offerings.

3. Strengthening Customer Relationships

Maintaining strong, long-term relationships with key clients helps reduce the risk of sudden loss. Tactics include:

• Multi-year contracts with clear renewal terms.
• Embedding products or services into the customer’s operations so switching is costly or inconvenient.
• Providing exceptional support and service to encourage loyalty.

4. Expanding Distribution Channels

Adding new distribution channels can open the door to a wider audience. For instance:

• Moving from direct sales to also include online platforms or partnerships.
• Using resellers or distributors to reach customers outside of the company’s core network.

5. Monitoring and Managing Concentration Metrics

Businesses often track metrics like the percentage of revenue from the top five customers. If the share grows too high, leadership can set goals to rebalance by acquiring more customers or expanding other accounts.

6. Strengthening Cash Reserves

Some companies hedge the risk by building strong cash reserves, securing flexible credit lines, or maintaining healthy profit margins. This makes them better equipped to absorb revenue shocks if a major customer leaves.

Recap: Customer Concentration

Customer concentration refers to the extent to which a company’s revenue depends on a small number of customers. If a large share of total sales comes from just one or a few customers, the business is considered to have high customer concentration.

Companies typically want to limit customer concentration risk because it protects revenue, strengthens pricing power, reassures investors, and creates long-term financial resilience. It’s essentially a safeguard against being too dependent on the success or decisions of just a few clients.

Frequently Asked Questions (FAQs)

What is customer concentration?

Customer concentration is when a large share of revenue comes from a small number of customers. This creates financial risk if those clients leave or reduce orders.

Why is high customer concentration risky for a business?

Because losing or downsizing a major customer directly affects revenue, cash flow, and long-term stability. It can also reduce a company’s pricing power in negotiations.

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Additional Resources

Net Dollar Retention

Customer Renewal Rate

LTV to CAC Ratio

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