One of your customers gives you a call. It’s polite, but firm: “We’re moving to a competitor. Effective next month.”

You take a breath. You ask why. You offer a discount. They say no.

You check your numbers. This one customer was 8% of your annual revenue.

Suddenly, your financial forecast for the year is broken. You call your CFO. You convene an emergency meeting.

What you’re experiencing is Customer Concentration Risk.

And if you haven’t thought about it, you’re about to.

The Pareto Principle (80/20 Rule)

There’s a well-known pattern in business: 20% of your customers generate 80% of your revenue.

For some founders, it’s even more extreme: 10% of customers generate 90% of revenue.

This isn’t a bug. It’s reality. Some customers are bigger than others. Some industries have massive enterprise deals and small SMB deals.

The Pareto Principle isn’t the problem. Blindness to the Pareto Principle is.

Let me show you what I mean.

You run a SaaS company. Your revenue is $2M annually. You have 500 customers.

Here’s the breakdown:

Top 10 customers: $1.2M (60% of revenue)
Next 40 customers: $600k (30% of revenue)
Bottom 450 customers: $200k (10% of revenue)

This distribution is normal. But what happens if one of those top 10 customers leaves?

Your revenue drops to $1.9M. Your growth forecast for next year is suddenly in jeopardy. Your ability to hire, invest in product, and fund marketing all get re-evaluated.

And here’s the thing: You were probably unprepared.

Why Concentration Kills Companies

I want to walk you through a real scenario.

You’re a B2B software company. You sign a big enterprise deal: $500k/year. It’s your largest customer. It represents 25% of your annual revenue.

For one year, you’re thrilled. You build product roadmap around their needs. You assign a dedicated support engineer. You reduce everyone’s workload because the “revenue is secured.”

In year two, you’re up for renewal. The customer’s requirements have changed. They now need custom integrations. They want 99.99% uptime SLAs. They want a dedicated account manager.

You say yes to everything.

In year three, the contract renewal comes up. They demand a 40% discount because “you’re now dependent on us as a customer.”

They’re right. You are.

You take the deal because losing $500k would break you. You now make $300k from this customer instead of $500k. Your margins are destroyed.

And even worse: You still have a dedicated team assigned to them. Your unit economics are now negative.

This is called dependency risk. Your business has become a subordinate to one customer.

How to Measure Concentration Risk

We track a metric called the Herfindahl-Hirschman Index (HHI), but don’t let the fancy name intimidate you.

It’s just a way to measure how concentrated your revenue is.

The formula is: Sum of (each customer’s revenue / total revenue)²

Here’s an example:

Scenario A (Highly Concentrated):

Customer 1: $500k / $2M = 25%, squared = 0.0625
Customer 2: $400k / $2M = 20%, squared = 0.04
Customer 3: $300k / $2M = 15%, squared = 0.0225
Customer 4: $250k / $2M = 12.5%, squared = 0.0156
Customer 5: $200k / $2M = 10%, squared = 0.01
All others combined: $350k / $2M = 17.5%, squared = 0.0306
HHI = 0.1862 (Out of a max of 1.0 for a monopoly)

Scenario B (Diversified):

Top 20 customers average $50k each: $1M / $2M = 50%, and distributed evenly
Each customer: $50k / $2M = 2.5%, squared = 0.000625
20 customers × 0.000625 = 0.0125
Bottom 80 customers: $1M / $2M = 50%, distributed
HHI = roughly 0.25-0.30 (much lower than Scenario A)

Lower HHI is better. It means your revenue is distributed across many customers.

For most SaaS companies, a healthy HHI is below 0.15. For e-commerce (which naturally has many small customers), it’s below 0.05.

If your HHI is above 0.25, you have serious concentration risk.

The Early Warning System

We build your automation to flag concentration risk before it happens.

Here’s what we track:

1. Top Customer Revenue Trend Is your largest customer growing, flat, or declining? Is their contract up for renewal in the next 6 months? (Flag it now.)

2. Customer Churn Rate by Segment Enterprise customers churn at 10% annually. But if your top 10 customers are churning at 15%, that’s a red flag. Your largest customers are more likely to leave.

3. Revenue Concentration by Industry, Product, or Geography Sometimes the problem isn’t “one customer is too big” but “all my revenue comes from one industry.”

If you’re a SaaS for fashion retailers, and fashion retail enters a recession, your entire business is at risk. You might have 500 customers (good HHI), but they’re all exposed to the same market shock.

4. Contract Renewal Dates We pull this from your CRM and flag upcoming renewals.

If your top 5 customers all renew in the same month, that’s a cash flow nightmare.
If they’re spread throughout the year, you have flexibility.

How to Reduce Concentration Risk

This isn’t glamorous work, but it’s necessary.

1. Build a Pricing Strategy That Encourages Mid-Market Enterprise deals feel great ($500k deals!), but they’re risky. Mid-market deals ($20-100k) are stable and numerous. If you can get 100 mid-market customers instead of 5 enterprise customers, your HHI drops dramatically.

This means lowering your enterprise prices slightly and raising your SMB prices to match. Most founders resist this because the big deal feels like a “win.” But it’s a trap.

2. Set Revenue Concentration Targets Decide: What percentage of revenue is acceptable from a single customer?

For most healthy businesses:

No single customer should exceed 15% of revenue.
Top 10 customers should not exceed 60% of revenue.
Top 20 customers should not exceed 75% of revenue.

Once you hit these limits, you push back on new deals from existing mega-customers and redirect sales effort to new customer acquisition.

3. Diversify Your Customer Base Actively expand into new industries, geographies, or use cases.

If you’re an e-commerce platform and 80% of revenue comes from apparel companies, start pushing into food and beverage, electronics, or other verticals.

This is harder than just taking enterprise deals from existing industries. But it’s the long-term health move.

4. Build Product That Works for Smaller Customers Most SaaS platforms over-engineer for enterprise needs. They add complexity, they add cost, and they make the product unusable for smaller customers.

If you intentionally build a “lite” version for SMBs, you can serve more customers, reduce concentration, and build a more stable business.

The Board Conversation

If you’re raising money or have a board, concentration risk comes up.

VCs will ask: “What’s your revenue concentration?”

If you answer, “Our top 5 customers are 70% of revenue,” they will lower your valuation.

Why? Because if one customer leaves, your business valuation drops 14%. That’s not a “company,” that’s a “client contract.”

If you answer, “Our top 5 customers are 30% of revenue, and we have 500+ customers with diversified industries,” they see a real business.

Same revenue total. Different risk profile. Different valuation.

The Takeaway

You probably love your big customers. They fund your salary, they give you stability, they make you feel like you’ve “made it.”

But they’re also the biggest risk to your survival.

We track your concentration risk alongside your growth metrics. If we see that you’re building a business on the back of a few large customers, we’ll tell you.

It’s not sexy. It’s not a growth story. But it’s the difference between a sustainable business and one that implodes when one customer walks.

The Pareto Principle isn’t wrong. But blindness to it is fatal.

Wiki Section: Actionable Automation (The “Product” Layer)