Evaluating Customer Concentration when a Company utilizes Distributors

January 11, 2024

by a searcher from University of Cincinnati - Carl H. Lindner College of Business in Bear, DE, USA

Hi All,

Could please provide your thoughts on the following?

The target company utilizes large distributors to sell its products and as a result the top three clients (i.e. these large distributors) account for 55% of the revenue. Now the question is: should we treat these distributors just like any other clients and conclude that the business has high customer concentration or is there a different approach to evaluate customer concentration when distributors are involved?

Your valuable insights are much appreciated.

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Reply by a searcher
from Rhodes College in Houston, TX, USA

You might look at a distributor similarly to any other customer in the sense that at any moment there is risk of them cutting off demand entirely. However, think about the differences between a B2B and B2C sales relationship. When other businesses are your customers, you're typically working together to capture profits along the value stream. Conversely, a consumer is buying some sort of utility. Thus, a business customer (distributor) has more to lose from cutting off the relationship entirely.

You should seek to understand the business and interpersonal relationships between each party. Who are the key players holding sales relationships at targetco and what do they control? Also look at other qualitative factors like tenure, trajectory, and your size of their wallet.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would largely agreed with ^redacted‌. I do believe the risk is slightly less than with a direct customer. However, having 55% concentration between three customers is not terrible. We have certainly seen much worse. Also, depending on the number of items sold by each distributor, the more items they sell the sticky they can be. I hope this helps. If you would like to talk further, please let me know. You can reach me directly at redacted Good luck!

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