DesignBiz: When to Diversify Your Client Base
No single client should account for more than 25% of a studio’s business. When it happens—and it will!—immediately draw up a list of new potential clients to call.
Here’s a brief personal story that explains why.
In the late 90s, I worked at a design studio that had a major telecommunications client. More than 50% of our monthly billings were derived from creating logos and names for new product launches, helping to brainstorm print ads and direct mailers, and otherwise serving as a creative sounding board. There was no retainer agreement, only new projects that were opened with a rough time estimate and hourly rate.
It was creative nirvana. You could spend as little or as much time as you wanted on a project, as long as you had a range of thinking in your comps. Our clients trusted us, and we trusted them.
My wife and I had been discussing moving to Seattle for some time, and the final decision to make the move was difficult—mainly because this firm was such a great place to work. But I gave my notice, my wife and I packed up our place and hopped in our car for a month-long cross-country jaunt. One morning in Chicago, while lolling at my sister-in-law’s kitchen table eating some oatmeal, I saw in the newspaper that my client’s company had misstated earnings across all of their financial statements and were going to declare Chapter 11 bankruptcy. The project work from that client would bleed away from my former employer.
So, it’s easy to be optimistic about what you can control in your designer/client relationship. You can inform them and provide insight. You can educate them regarding their options, both strategic and tactical. You can even be Chief Design Officer and sit at the big polished mahogany table powering up your big presentation on how you’ll optimize their customer experience and rethink their brand and make amazing new products that will bring in billions. You can make your direct design clients happy, and show success with every project that you do. But you can’t fully control their business decisions beyond what you design, or volatile business conditions that may lead to their demise.
This is why you need to diversify the mix of clients that you choose to work with. Diversification helps to reduce the level of vulnerability you take on from your client accounts as a business owner. Would you put all of your money in one outperforming stock, assuming that in two or three years it will continue to increase in value? As the legally mandated disclaimer says on any investment vehicle: Past performance is no guarantee of future results.
Here’s a few reasons why diversification will be critical for your design business:
Diversification will allow you to sustain the loss of a client while protecting your studio overhead. If you hire a dozen people to service a client that provides a high percentage of your revenue, when that client dematerializes, so do all those jobs. (This can be common practice at large agencies that seek retainer relationships.) This is a weak business model for a small firm and can’t be sustained without risking the collapse of the entire business.
Diversification protects you from cash-flow fluctuations due to client policies in accounts payable. If you aren’t asking for payment up front for each design phase, and instead offering credit and Net 15/30/45 billing, you may have lived through this problem with your largest clients. If a client needs to choke down on their accounts payable, it’s your credit on the line, and asking for interest on the late payment won’t make up for your scramble to assess the impact to your business’s cashflow.
Diversification protects you from being in a poor negotiating position due to being beholden to one benefactor. When a client knows that you are dependent on their business, it can cause price negotiations that risk diluting the agency’s profit margin. Every agency I’ve worked at that had a lopsided client portfolio has suffered at one point due to this.
Diversifying your client base will make for a more compelling portfolio. The benefit of a diverse portfolio is that it demonstrates your curiosity, your range of skills in various domains of design, and the desirability of your services. If you want to be the designer whose portfolio contains work samples from only one business type or industry category, go right ahead. But chances are there are only so many similar clients you’ll be able to find.
Even when you become frighteningly busy due to the work on your plate, continue to call prospective clients and new business leads. Continue your networking. If you close down and focus all your attention on making your sole client happy, in the short term you may profit—but your risk of harming your business in the long term will only increase.
Then again, it’s only when the rug is pulled out from under you that you can gain a new perspective… when you’re lying on the floor.