Customer Concentration Risk in the Sales Forecast

Bulk Risk Concentration is concentration risk in the forecast: a very small number of deals carries a dominant share of a period’s expected funnel value (bEFV or rEFV). “Forecast” means that expected value, not cEFV. cEFV is the best case of the forecast range, not the realistic case. Concentration shows when the expected value is calculated without the largest deals.

The forecast adds up and rests on a few names

The quarter looks good on paper. The pipeline is full, and expected revenue is close to plan. In the forecast meeting, the same few customer names still come up every time.

For a finance leader this creates a contradiction. The total gives no reason to ask questions. Yet everyone in the room knows that the quarter looks different if one of those deals does not close.

Three everyday observations point to the pattern:

• The conversation about the quarter is a conversation about individual deals.
• One postponed close date visibly changes expected revenue for the whole period.
• Cost and liquidity planning waits for news about a single contract.

The usual pipeline report shows a total. The pipeline report does not show how that total is spread across the individual deals.

Customer concentration risk is usually measured on revenue that is already booked. This article looks at the same risk one step earlier, as concentration in the forecast. Funnel Economics calls the pattern Bulk Risk Concentration: a very small number of deals carries a dominant share of a period’s expected funnel value.

Why does an expected value hide concentration?

An expected value is a sum of weighted amounts. bEFV, the structural expected value of the funnel, multiplies each deal’s amount by its stage win rate and adds up the results.

In the CRM, a deal is called an opportunity. The stage win rate is, of the deals that stood in the stage and were decided, the share that was won.

rEFV, the risk-adjusted revenue expectation, additionally weights the same pipeline by SLA Health. SLA Health compares a deal’s total age in the funnel with two time targets that the company sets per stage and opportunity type (line of business).

rEFV is an expectation as well: a calculated value, not a result.

For a pipeline with many deals of similar size, an expected value is a useful number. Some deals are won, others are lost. Across many deals, the deviations even out.

A single deal has no average. A deal is won or it is not. The expected value counts the deal at a partial amount that never occurs as an outcome.

When a handful of deals carries most of the total, that evening-out has nothing to work with. The result of the period can then land well above or well below the expected value. Which of the two happens is decided by those few deals.

The total itself is not wrong. An expected value simply says nothing about how it is spread across the deals. Two pipelines with the same expected value can differ widely in stability.

For financial planning, one sober conclusion follows: predictability needs diversification. Concentration puts volatility into the forecast even when its total is right.

A forecast that depends on a very small number of deals is no longer an average. It is a bet on individual closes.

How does concentration become visible?

Two numbers make concentration visible: the share of the largest deals, and the concentration sensitivity: the expected value without them. Both come from the same data as the expected value itself, the open deals of the period.

The share of the largest deals

The first number is a share. For every open deal, its contribution to the expected value is known. For bEFV, that is its amount multiplied by its stage win rate. For rEFV, the weighting by SLA Health is added.

The deals are ranked by that contribution. The contribution of the largest deals is divided by the total expected value of the period. The result says what part of the total depends on this small group.

The concentration sensitivity shows the expected value without the largest deals

The second number is the concentration sensitivity. The expected value of the period is built once more, this time without the deals that make up the concentration.

The concentration sensitivity is not a second forecast. The concentration sensitivity answers one question: what is left of the expected value if the deals that carry it do not close in this period?

For the CFO, the concentration sensitivity belongs next to the total. Only the two numbers together expose how much volatility the concentration puts into the forecast.

The yardstick is your own history

This article gives no universal cut-off for the share. What carries information is the series.

Every figure in a paper for the leadership body comes with its series: the periods that have run next to the current value.

This article therefore recommends building the share and the concentration sensitivity the same way every period and placing them next to the values of prior periods.

If the share of the largest deals rises against prior periods, the period depends more on single closes than before.

Every figure in a paper for the leadership body also carries its case count: how many decisions carry the figure. This article reads it as the number of deals behind an expected value.

How well the forecast was calibrated is shown after the period ends by EFV Ratio, the comparison of won revenue with rEFV. EFV Ratio compares actual Closed Won revenue with rEFV at the start of the period. It says nothing about target attainment and can stand beside a missed plan.

The extreme case, where one deal is the pipeline

Concentration has an extreme case. Funnel Economics calls it the single point of failure: one deal carries almost the entire revenue expectation.

The single point of failure is read at a different level from Bulk Risk Concentration. Bulk Risk Concentration looks at the expected value of a whole period. The single point of failure looks at one sales rep or one segment, meaning one delimited part of the business.

The quantity is a different one, too. The yardstick here is the feasible pipeline. That is the part of the open pipeline that, going by historical stage durations, can still close before the period ends, valued as a risk-adjusted expectation.

The pattern has two features. First, the feasible pipeline of one sales rep or segment rests almost entirely on a single deal. Second, the stage win rate where that deal sits is historically high.

bEFV counts such a deal at almost its full amount. The calculation therefore looks intact: the target seems covered. In fact, the calculation depends on one close.

What sales leadership does in that situation is covered in the article on pipeline risk, when one deal carries the forecast.

If that deal slips into a later period or is lost, the expected revenue of the sales rep or segment falls away almost completely. One deal is not a pipeline.

What helps against concentration in the forecast?

Concentration cannot be calculated away. The countermeasures work in two places: on the deals that carry the forecast, and on the breadth of the pipeline.

This article recommends four steps:

1. Expose the concentration. The expected value goes into planning; beside it, as a check, the concentration sensitivity.
2. Review the deals that carry the forecast one by one. A deal review for each is the obvious step.
3. Widen the pipeline. In parallel, sales builds new pipeline at the top of the funnel so that the risk spreads.
4. Watch the series. The share and the concentration sensitivity are read against your own history every period.

An obvious division of tasks is this one. The concentration sensitivity is put in front of the CFO and stands next to the total. The CRO (chief revenue officer) takes care of a wider inflow of healthy pipeline at the top of the funnel.

For a single point of failure, the sales rep’s first-line leader runs a deal review immediately.

The steps do not remove the risk. The steps show how much of the forecast depends on a few closes, and over time they spread the risk across more deals.

How concentration in the forecast differs from related findings

Customer concentration risk in the usual sense looks back. The measure shows what part of booked revenue comes from the largest customers. It is used, for example, in company valuation, in acquisitions and in credit assessment.

Concentration in the forecast concerns revenue that is still supposed to arise in the period. The measurement comes from the open deals of the period.

The two views complement each other. A company can be broadly spread in booked revenue and still depend on a few closes in the running quarter.

Strategic Decoupling asks a different question. In Strategic Decoupling, the value of the open pipeline rises over several periods while rEFV falls. That pattern is about the relation between pipeline value and expected value. Concentration in the forecast is about how the expected value is distributed across the deals.