What is Client Concentration?
Client concentration, also known as sales concentration, refers to the extent a business’s gross receipts depend upon a small group of clients. It can mean a small number or select clients generate a disproportionate amount of sales. For example, in the senior care industry, family care homes (i.e., 6 or less beds) or small assisted living facilities serve a small census. Newly established home care or home health agencies may have a few key clients. Conversely, large assisted living facilities and established home care and home health agencies have broad client bases.
Is Concentration Good or Bad?
Well, it depends. For family care homes and small assisted living facilities, a small but dependable client base provides steady cash flow for the business. Many operations have patients they have served for years and experience little turnover. Maintaining a loyal client base minimizes advertising costs and agency referral fees. Home care and home health agencies that benefit from a core group of clients enjoy predicable income streams. Their staff is well-trained to service the needs of these core clients. Quality of care is good for this core client group. These traits are essential when establishing an agency.
There are, however, risks of having a concentration of clients. A sudden and significant drop in census can have a significant impact on the operation’s viability. For example, losing a resident in a family care home could equate to at least 17% in lost gross receipts. Patients seeking to renegotiate rates or terms may see their bargaining power strengthened if they believe they can impact the operation. An operation concentrated in a particular client segment (e.g., Medicaid patients) may find it hard to diversity their client base (e.g., difficult to attract private pay clients). Also, bankers tend to negatively view client concentration. They deem the revenue stream susceptible to sudden, unforeseen changes. Such a view may make it hard to borrow money or attract investors. Finally, buyers may negatively view a business that has client concentration and may demand price discount from sellers.
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