Small Business Terms: What Is Concentration?

by Thom Tracy

0 min read

Concentration is a measure of how much of your revenue is coming from one specific client or partner. If too much business is coming from too few clients, this can signal danger for the business since at any time a client may stop using your product or service, causing revenues to drastically drop or even your business to close.

Though used for anti-trust cases, a small business can get a rough idea of its concentration by using the Herfindahl index. Simply take the revenue percentages of each client as whole numbers, square them, and add them up. For example, if a company has three clients comprising 20%, 30%, and 50% of their revenue, the index would be:

20^2 + 30^2 + 50^2 = 400 + 900 + 2,500 = 3,800

Any value above 2,500 indicates that the business is too concentrated and needs more clients.

References & Resources

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