Balance sheet

Quality (philosophy)

Marketing

Customer equity

Initial public offering

Philosophy

Service (business)

Bargaining power

Customer profitability

Microeconomics

Chromatography

Balance (ability)

Portfolio

Economics

Business

Customer lifetime value

Customer retention

Service quality

Epistemology

Profitability index

Revenue

Industrial organization

Medicine

Chemistry

Physical medicine and rehabilitation

Sample (material)

Finance

Customer satisfaction

Journal of Marketing

Using the notion of customer concentration, the authors argue that firms should evenly spread their revenues across their customers, rather than focusing on a few major customer relationships. Prior literature suggests that major customers improve efficiency and provide access to resources, thereby producing positive performance outcomes. However, building on industrial organizational literature and modern portfolio theory, the authors argue that concentration of revenues reduces the supplier firm's bargaining power relative to its customers and hurts the ability of the supplier firm to appropriate value, which, in turn, hurts profits. Using a sample of 1,023 initial public offerings (IPOs) and robust econometric methods, they find that customer concentration reduces investor uncertainty and positively impacts IPO outcomes, but significantly hurts balance sheet–based outcomes (e.g., profitability). The results suggest that a 10% increase in customer concentration reduces profitability by 3.35% (or about $7 million) in the subsequent year, or 9.4% cumulatively over the next four years (or about $20.32 million). Further, the authors find that the negative effects of customer concentration decrease with increase in organizational (marketing, technological, and operational) capabilities and increase with low customer credit quality.

Assessing the Impact of Customer Concentration on Initial Public Offering and Balance Sheet–Based Outcomes