Table of Contents
Why Investors Should Favor Companies Serving a Diverse Range of Customers
How/ Where to check this information?
Investor Relations Materials
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
KEYPOINTS
When investing in B2B companies, look for those with a diverse customer base helps reduce risk and ensures more stable, long-term growth.
Companies like Fortinet, SPS Commerce, and ServiceNow serve a wide range of customers by employee size and revenue, making them resilient to market fluctuations.
Conversely, companies with a narrow focus on small businesses, like Shopify, may face greater risks due to their customers’ higher failure rates.
When evaluating a company's medium to long-term growth potential, it's crucial to consider the diversity of its customer base, especially for B2B businesses. Companies that serve a wide range of customers, in terms of both employee size and revenue generated, are often more resilient and better positioned for sustained growth. For investors, this makes such companies attractive long-term growth candidates, as they can navigate downturns in any one segment while continuing to serve others.
Why Investors Should Favor Companies Serving a Diverse Range of Customers
1. The Importance of a Diversified Customer Base
B2B companies that have a broad customer mix—spanning small, medium, and large businesses—tend to have more stable revenue streams. These businesses are less vulnerable to economic fluctuations or sector-specific challenges, as their revenue isn't overly reliant on a single type of customer.
How/ Where to check this information?
i) Research websites like Enlyft.com
Search for the company or product name and look under
i) Distribution of companies that use Company's products based on company size (Employees)
ii) Distribution of companies that use Company's products based on company size (Revenue)
ii) Investor Relations Materials
Examples of Companies with Diverse Customer Bases
Let’s look at some strong examples of companies that maintain this diversity:
i) Fortinet
Fortinet's customer base is well-balanced in terms of both the size of the companies it serves and their revenue generation. Here’s a breakdown:
Customer Employee Size:
26% are small (<50 employees)
48% are medium-sized
26% are large (>1000 employees)
Customer Revenue:
46% are small (<$50M)
21% are medium-sized
28% are large (>$1000M)
This spread means that Fortinet can withstand downturns among smaller customers while benefiting from the stability of larger ones.
Additionally, Fortinet's customers are often in fast-growing industries like Information Technology and Services (25%) and Computer Software (7%) .
ii) SPS Commerce
Similarly, SPS Commerce has a diverse customer mix:
Customer Employee Size:
33% are small
46% are medium-sized
21% are large
Customer Revenue:
53% are small
17% are medium-sized
25% are large
A balanced customer base like this provides the flexibility to grow alongside smaller customers while benefiting from the reliability of larger enterprises .
iii) ServiceNow
ServiceNow is another prime example of a company that benefits from a diversified customer base:
Customer Employee Size:
26% are small
41% are medium-sized
34% are large
Customer Revenue:
41% are small
18% are medium-sized
35% are large
As with Fortinet, ServiceNow’s customer base includes companies in rapidly growing sectors like Information Technology and Computer Software.
Risk of Companies with Narrow Customer Bases
On the other hand, companies with a less diverse customer base can be riskier for investors. Shopify serves as a key example:
iv) Shopify
Customer Employee Size:
64% are small
21% are medium-sized
15% are large
Customer Revenue:
66% are small
17% are medium-sized
9% are large
The concentration of Shopify’s customer base on smaller businesses—many of which are startups with a higher failure rate—exposes the company to more significant risks. A heavy reliance on small customers, who often have more volatile cash flows, means Shopify's revenue growth may be more erratic and vulnerable to economic downturns .
Conclusion
For long-term investors, focusing on companies with a diverse mix of customers in terms of employee size and revenue is a wise strategy. Such companies are better equipped to handle market changes, reduce risk, and sustain growth. Examples like Fortinet, SPS Commerce, and ServiceNow highlight the benefits of diversification, while Shopify illustrates the potential risks of over-reliance on small, startup customers.
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