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Don't let a customer kidnap your business!

  • 2001-04-26
  • Paul E. Adams
Financial advisers tell you to hedge your bet by diversifying your investments to minimize risk. You should diversify your business for the same reason; to reduce risk by avoiding dependency. To insure that you remain in business, be certain that no one customer or supplier is in a position of "controlling" your company. You may lose control if you allow your business to be "held hostage" by a powerful customer or supplier – your business will become an "employee." And it can easily happen. There are many stories of small companies falling victim to the temptation of the comfort and ease of catering to a big customer.

The advice "Do not put all your eggs in one basket" warns of the danger of dependency. Mistakenly, we often think the status quo will not change. The Greek philosopher Heraclitus left us with the enduring message: "The only permanent thing in life is change." We change, our customers change and our markets change, and our products become obsolete from change. Thus, the anticipation of change should be part of your business planning. For example, you may have a large profitable customer that accounts for the bulk of your business, but what if your customer fails? What if another company buys your customer? What if the purchasing agent quits? So many things are possible that dependency on a single customer or product is foolhardy and dangerous to your survival.

I witnessed such dependency nearly destroy a company. During the late 1960s I owned a sales and marketing agency representing a group of record companies, including Sun Records of Nashville. The Sun label had recently been bought by former Mercury Records producer Shelby Singleton from Elvis Presley's manager Colonel Parker. The ownership of Sun gave Shelby the recording and publishing rights to some of the early rock-and-roll favorites recorded by such artists as Jerry Lee Lewis.

At first, all went well. After re-arranging the material and designing new cover artwork, these "old" favorites went on to a second market life. Nevertheless, after two years of aggressive selling efforts the demand dried up as the market became saturated. Now, Shelby was in need of new talent.

At the right moment, country singer Jeannie C. Reilly walked into Shelby's life with the hit song "Harper Valley PTA." When Shelby finished the recording session, he supposedly commented to his recording engineer: "This is a good country record." He did not realize at the time he produced one of the biggest record hits of his career.

Sun Records exploded. "Harper Valley PTA" was played on radio stations everywhere. It was an instant top 40 hit. The money flowed in. Record distributors flooded Shelby with orders. Overnight, he expanded his company into a mini conglomerate. He built a studio, bought a record pressing plant, and dabbled in creating a theme park, as well as buying my company. At the time he told me he had waited all his life for such an opportunity.

He was confident his luck would continue. He gambled on Jeannie C. Reilly recording another top-selling album. However, it did not happen. There was little airplay, leaving no hope of creating a much needed "hot" single from the album. The new album was dead. Jeannie C. Reilly's moment of stardom appeared over. The party at Sun Records was over. It had been one artist, one album and one big gamble.

If I remember correctly, to prevent bankruptcy, Shelby sold his record pressing plant, found a way to lease out his studios, abandoned his theme park project and shut down my former company. Finally, it was only Shelby's charm that kept his creditors at bay. His company is still in business but in a much different way – it is very quiet.