Concentration Risk: The Business Metric You're Probably Ignoring

The Number Behind the Number

Your company did $20M in ARR last quarter. Congratulations. But here's a question that changes the meaning of that number entirely: How many customers does it take to get to 50% of that revenue?

If the answer is 80 customers, you have a diversified revenue base. If the answer is 3 customers, you have a concentration problem that makes your $20M far more fragile than it appears.

Concentration risk is one of the most important structural metrics in business, and most companies don't measure it systematically. They might have a vague sense that "we're a bit top-heavy" or "our largest customer is pretty big," but they don't quantify it, track it over time, or analyze it across multiple dimensions.

This is a blind spot with real consequences.

What Concentration Risk Actually Is

Concentration risk measures how unevenly a metric is distributed across the entities that compose it. High concentration means a small number of entities account for a disproportionate share of the total. Low concentration means the total is spread relatively evenly.

The classic framework is the Pareto principle — the 80/20 rule. In many businesses, 80% of revenue comes from 20% of customers. But the specific ratio varies enormously, and the deviation from 80/20 is where the insight lives.

Consider three companies, each with $20M in ARR:

• Company A: Top 10% of customers account for 45% of revenue. This is a healthy distribution — somewhat concentrated, but no single customer is existential.
• Company B: Top 10% of customers account for 72% of revenue. This is a warning sign. Losing one or two key accounts would materially impact the business.
• Company C: Top 10% of customers account for 91% of revenue. This company's revenue is effectively a portfolio of 5-6 large contracts. Their "ARR" is really "a few big relationships."

All three report "$20M ARR." The number is identical. The risk profile is completely different.

Four Dimensions of Concentration

Customer concentration is the most commonly discussed, but it's not the only dimension that matters. Concentration risk can hide in at least four places:

Customer Concentration

This is the obvious one. If your top 3 customers represent 40% of revenue, you're one procurement decision away from a crisis. But customer concentration also matters for metrics beyond revenue:

• Support ticket concentration: If 5% of customers generate 60% of support volume, you have a product-market fit issue with a specific segment.
• Feature usage concentration: If one customer drives 80% of requests for a specific feature, that feature is a custom build, not a product capability.

Product Concentration

How much of your revenue comes from a single product or product line? Companies with high product concentration are vulnerable to competitive disruption, technology shifts, or regulatory changes that affect that one product.

A SaaS company generating 85% of revenue from a single product built on a third-party API has high product concentration compounded by platform dependency. If that API changes terms or shuts down, 85% of revenue is at risk.

Channel Concentration

Where do your customers come from? If 70% of new business comes from a single marketing channel — say, Google Ads — you're one algorithm change away from a pipeline crisis. Companies that went all-in on Facebook advertising in 2020 learned this lesson the hard way when iOS 14 privacy changes disrupted their acquisition model.

Channel concentration also applies to sales. If 60% of new ARR comes from one sales rep or one partner, your growth engine has a single point of failure.

Supplier and Vendor Concentration

On the cost side, concentration risk in your supply chain or vendor relationships creates fragility. If your primary cloud infrastructure runs entirely on one provider, if your key raw material comes from a single supplier, or if your payment processing depends on one processor — these are concentration risks that don't show up in revenue metrics but can cripple operations.

How to Measure It

Fig's Concentration Analysis algorithm applies several quantitative methods to measure concentration:

Pareto Ratio: What percentage of entities account for 80% of the metric? The closer this number is to 20% (or lower), the more concentrated you are. Track this over time — if the ratio is trending downward, concentration is increasing.

Top-N Contribution: What percentage of the total do the top 1, 5, 10, and 20 entities contribute? This gives you a curve that shows the shape of your concentration, not just a single number.

Herfindahl-Hirschman Index (HHI): Borrowed from antitrust economics, HHI sums the squared market shares of all entities. It produces a score between 0 and 10,000, where higher values indicate greater concentration. This is useful for comparing concentration across dimensions that have different numbers of entities.

Concentration Trend: Is your concentration increasing or decreasing over time? A company that was well-diversified 18 months ago but has been growing primarily through large enterprise deals may have developed a concentration problem without realizing it.

Concentration as a Diagnostic Tool

Beyond measuring risk, concentration analysis is a powerful diagnostic tool for understanding metric changes.

When revenue drops 12%, one of the first questions should be: Is the drop concentrated or distributed?

• Concentrated drop: 80% of the revenue decline comes from 2 customers. This is an account-level problem — likely churn, contraction, or timing. The response is account-specific.
• Distributed drop: The decline is spread across 50+ customers, each contributing a small amount. This is a systemic problem — a pricing issue, competitive pressure, or product gap. The response requires a strategic change.

The same applies to positive changes. If revenue grew 15% last quarter, was that growth concentrated in a few new logos or distributed across the base? Concentrated growth from a few large deals might look good on the quarterly report but is actually increasing your concentration risk for the future.

Managing Concentration

Measuring concentration is the first step. Managing it requires incorporating concentration metrics into your operational rhythm:

Set concentration thresholds. Define what "too concentrated" means for your business. A common starting point: no single customer should exceed 10% of revenue, and the top 5 customers should not exceed 30%.

Monitor concentration trends. A single quarter of high concentration might be an anomaly. A four-quarter trend of increasing concentration is a strategic risk that requires a response.

Factor concentration into growth planning. If your growth plan relies on landing 3 large enterprise deals, model what that does to your concentration profile. Growth that increases concentration is growth that increases fragility.

Use concentration in RCA. When Fig's Root Cause Analysis identifies a metric change, Concentration Analysis automatically determines whether the change is isolated or systemic. This distinction changes the response entirely.

The Uncomfortable Truth

Most companies avoid measuring concentration because the results are uncomfortable. It's easier to celebrate $20M in ARR than to acknowledge that $8M of it depends on two relationships that are up for renewal in Q3.

But the risk doesn't go away because you're not measuring it. And companies that systematically track and manage concentration make better decisions about where to invest, which customers to prioritize, and how to build a business that's resilient rather than just large.

The metric on your dashboard tells you how big you are. The concentration behind that metric tells you how stable you are. Both numbers matter. Only one of them tends to get measured.