Marketing faculty research explores the pitfalls for young firms to heavily depend on a key customer
Marketing professor Ramkumar Janakiraman and his co-authors in their research examined the effects of young firms’ dependence on a main customer to determine their chances of survival and growth. While the research team found that dependence on a key customer can be detrimental for the survival of young firms, that same trait can actually have a positive impact on the organization’s growth. In their findings, they saw the positive growth effect is stronger for less-experienced firms.
“A knowledge-based view of managing dependence on a key customer: survival and growth outcomes for young firms” — Journal of Business Venturing, November 2020.
Why it matters:
- Attracting customers is one of the hardest challenges for entrepreneurial firms. Once they’ve attracted customers, the young firm has to determine how to manage them. They have to decide whether to have a large customer portfolio with each individual customer accounting for a small percentage of sales; or should they manage one or a set of a few key customers that generate a significant portion of the firm’s revenues? The downside of one or a few customers is they are more financially dependent on those accounts.
- Dependence on a key customer is hazardous for a young firm’s survival. With Janakiraman’s team’s findings indicating a significant negative impact on firm survival, young firms whose business relies on one main client tend to have limited resources, making it difficult to deploy longevity strategies such as safeguarding investments and making acquisitions.
- If a young firm manages to survive with dependence on a key or small number of customers, the firm’s total customer base tends to increase. The company can leverage the relationship with the key customer, who can bring in other business based on their experience with the young firm’s characteristics like increased innovation, sales cost efficiency and increased reputation.
- The more industry experience the young firms’ top leaders have, the likelier growth will come from the main customer relationship.
- When a firm is preoccupied with one key client, that relationship may make it difficult for the young firm to acquire other customers since they focus so much of their energy on that main client.
- Janakiraman and his co-authors used a sample of 180 young, technology-based firms who work directly with other businesses in the United Kingdom.
- Their rigorous statistical analyses ruled out factors that can affect firms’ customer portfolio growth beyond the effect of key customers.
Yli-Renko, Janakiraman and Denoo’s “A knowledge-based view of managing dependence on a key customer: survival and growth outcomes for young firms” won the 2021 EBS Best Paper Award.
About Ramkumar Janakiraman:
- Janakiraman arrived at the Moore School in 2015 and is now a marketing professor and a Distinguished Moore Fellow.
- His research focuses on econometric modeling of firm and consumer decision-making. Janakiraman's research encompasses digital marketing, multichannel retailing, social media marketing analytics, big data issues, health care and public policy.
- Janakiraman teaches post graduate courses on marketing analytics, customer relationship marketing and data mining. He has also led a class related to database projects for MBA students as well as a seminar on marketing models for doctoral students.
- He earned his bachelor's degree in engineering from the Indian Institute of Technology in Varanasi, India. Janakiraman also has a master's in materials science and engineering from the University of Pittsburgh and a Ph.D. in business administration from the University of Southern California.
Janakiraman researched this topic with Helena Yli-Renko, who was the professor of clinical entrepreneurship and director of the Greif Center for Entrepreneurial Studies at the University of Southern California before her death in April 2021; and Lien Denoo, an assistant professor in entrepreneurship in the management department at Tilburg University. Janakiraman worked with Yli-Renko when he was in the University of Southern California doctoral program and said she was an important mentor in his career.
Janakiraman is working on several research projects in the areas of multichannel retailing, social media marketing and health care marketing. One of his recent papers that examines the role of health care information exchange on health care quality is forthcoming in leading peer-reviewed business journal Management Science.