Customer-base concentration, profitability and distress across the corporate life cycle

Using a recently expanded data set on supplier-customer links, we examine how customer concentration affects firm profitability. We find that the relation between customer concentration and firm profitability is more complex than recent literature suggests. We confirm that customer concentration promotes operating efficiencies for profitable firms. However, we find a different result for younger, less profitable firms where customer concentration impairs firm profitability and significantly increases distress risk. Thus, the relation between customer-base concentration and profitability is non-linear; it is significantly negative in the early years of a firm’s public life, turning positive as the relationship matures. The reason for this dynamic relation is that firms who serve a few major customers make customer-specific investments that result in larger fixed costs and greater operating leverage. These relatively high fixed costs mean that customer concentration is risky for young firms, but can significantly benefit the firm if the relationship survives.