Something that I never thought I would hear myself say is that reading a 2014 earnings call transcript from Federal Express would be a moment that would change my life. The truth is, it not only changed my life, but it changed the way I think about business.
During almost every earnings call, there is a question and answer session at the end. Sometimes those posing the questions are asking them live and in the moment. Other times, the questions were gathered ahead of time, answers were prepared ahead of time, and then answered on the call. I do not remember the circumstances through which this question was posed. I only remember my answer.
The question was about Amazon. At the time, many of Amazon’s packages were delivered via FedEx. However, rumors has begin that Amazon was creating their own delivery service. What would happen to FedEx if Amazon stopped using them for delivery?
If you pause for a moment and think about this, what would happen to an company that loses what everyone perceives to be their number one client? As far as the world was concerned at that time, Amazon and FedEx were the same. “Dear, there is a FedEx package here for you.” “Oh, great, honey, that’s my Amazon order.” See? Same – at least as far as the general public was concerned.
However, FedEx didn’t see it as same. In fact, they saw it more as “some.” Only some of FedEx’s deliveries were Amazon. They had a much more diverse customer base that the world was even aware of.
Again, the question, what would happen to FedEx if Amazon stopped using them for deliver?
The answer: nothing.
The FedEx Executive explained that Amazon represented only 3% of their customer base. They said that allowing no customer to take more than 3% of their customer base was a strategic decision that protected their company. Allowing one company to use more resources may be profitable in the short-run, but if anything happened to that customer, the financial health of the corporation could be threatened.
Upon learning about the FedEx 3% rule, I remembered when I was on the board of a Church. It was around 2008. The recession was beginning to hit the Washington DC area very hard. One minute the church was experiencing tremendous growth, thinking about a building, a school for the children. The next minute, the church was close to collapsing. Upon inspection of the finances, the major contributions were coming from three families, all of whom had recently left the church for various reasons. The remaining 50 families were only contributing a few dollars each week, while these five had been contributing hundreds.
As an entrepreneur, a small business owner, I also looked at my own client base. I had three clients that essentially comprised 60%, 37%, and 3% of my income. If I lost either of the first two, I would have trouble making my rent. Losing my 3% client would not harm my finances. In the course of a year, I dropped the two largest clients and replaced them with two others. The mix was still the same. With COVID, the mix is beginning to even out just a little bit more. It looks like this:
|2016||2017||2019||April 2020||Ideal||June 2020|
The table above is something I created, literally, right now. Although I have known the 3% principle for years, I have never truly mapped it out for myself. Each day is literally a hustle to bring in what I can from the sources I have. Sometimes I think about obtaining other sources, but it’s often easier to put the time and energy into existing clients. However, is that smart?
You will notice that for client D, I was relying on it for 70% of my income in 2019. I worked for them as often as they would let me. Then in 2020 COVID-19 reduced their industry to 10% of what it was almost overnight. You see in the table that they are still 50% of my income. What the table is not showing is that my income right now is significantly less than it was before. You will also see that client C has gone from 3% to 47%. Thankfully, client C is still here. That client’s business is booming during the pandemic, so it has been great to be able to work for them to stay afloat. Client E is one that I would be okay letting go of as an income source.
In the ideal column, you will see that I used 10% instead of 3%. At the moment, my business is just me, so 3% would be spreading myself very thin. However, 10% is a good start. Once I accomplish 10%, I can increase the income goal, add more clients, and therefore reduce the percentage contribution of each.
The actual column is what happened when I put my numbers into a spreadsheet. I increased my current monthly income goal by $1,000 (I need new shoes, new brakes, and I want to increase my grocery budget). Then I determined the percentage for client E, since that is a set amount each month. I determined the minimum that client D would take up (since that client has a maximum but somewhat flexible required hours). Client C could be higher than it is, but I do sometimes experience burnout with that client, so I need to be careful how much work I accept. Client F is one that I could increase. Client K is the easiest to increase; however, it is at the bottom of the list because once all of the other clients are helping me reach my goal, Client K will be removed as an income source.
The point of all of this is that when running a business, it is important to not have all of your income coming in from one source. Multiple streams of income are very important just in case you run into a situation like I did with Client D. By diversifying my client base, I have not only been able to increase my income, but I have also increased my enjoyment of day-to-day life. Additionally, I have reduced my dependency. In fact, you can see with Client C that in April I significantly increased my dependency on that client. Continuing in this manner without developing other income streams would not be good for me or that client.