ROND Report

Concentration Risk

 By Danielle O’Rourke – January 26, 2018

I was looking at my email stats today and noticed today’s newsletter is the 37th ROND Report.  There is nothing special about the number 37, but I am coming up on the 1-year mark, which naturally prompted a moment of reflection.

First, I want to thank all the folks who have been following along since the beginning, as well as the folks who recently signed up.  I still slightly question your sanity for willingly submitting yourselves to my weekly ramblings.  Nevertheless, your feedback, insights and support have made this a fun experience for me and something I look forward to doing every week.

I’d love your feedback and input on what you would like to see with the ROND Report going forward.  What do you find valuable?  What have you liked about the ROND Report?  What turned you off or annoyed you (besides my terrible grammar)?

It’s not very often folks get to flip the table and critique an investor. I’m giving you a rare chance here.  Lay it on me. 

I can’t promise I will incorporate all your feedback, but I do want to ensure this remains a short, weekly newsletter that you enjoy reading and get some value from.  Email me at danielle@rondcapital.com with your feedback.

Now to the newsletter:


Topic of the Week: Concentration Risk

Last week the Huffington Post shut down it’s “unpaid blogger contributor program.”  Some of you may be thinking, “What the heck is that?” or “Who cares, Danielle?”   Bear with me for a minute as I explain.

The unpaid contributor program was a way for bloggers to build credibility and drive traffic to their websites.  For professional bloggers, traffic is the lifeblood of their businesses.  The more high-quality traffic they drive to their content, the more they get paid.  Any blogger who relied on this program as a referral channel to their website lost revenue.

But the blogger community isn’t the only group exposed to this type of situation.

Huffington Post’s contributor program is just one of the many third-party websites that content is shared on to drive traffic to websites, build audiences and capture sales.  Others include Google, Facebook, Linkedin, Youtube, Medium, etc.

All of these third-party distribution channels offer marketers the ability to attract a large audience, and many businesses rely on these channels to drive sales.  In fact, Google and Facebook represent 42% and 21% of U.S. digital ad spend, respectively.  Said another way, over 60% of digital ad spend is at the whim of Google and Facebook’s decisions.

There is real risk for any business who relies on these platforms to drive revenue. As an investor, I view this risk as one example of Concentration Risk.


What is Concentration Risk?

When I say “concentration,” I’m not talking about the thing we all lose at 3 pm on Friday afternoon.  I’m referring to the aspects of a business where success or failure is determined by a small concentration of forces.

While you may not have any exposure to the whims of Google and Facebook, you could have concentration risk in other elements of your business.  Here are a few of the more common types:

1)    Customer concentration – How much of your revenue is derived from your largest clients?  What would happen to your business if these clients fired you or went out of business?

2)    Supplier Concentration – How reliant are you on certain suppliers? What happens if those suppliers start delivering their goods weeks or months late?  What if they go bankrupt?

3)    Product Delivery Concentration – Does one professional drive the majority of your practices work product? Do you rely on third-party contractors or services to delivery your product into customers’ hands?

4)    Sales Productivity Concentration – Do you have one sales rep or channel partner who drives most of your new business?  What happens if that sales rep goes to your competitor?

5)    Regulatory Concentration – Does your business rely on certain regulations staying in place?  What happens if politicians get rid of those regulations?

6)    System concentration – Do your internal processes and systems rely on third-party technology working properly? What happens if the third-party technology goes down?

Concentration risk is not something that can be (or necessarily should be) avoided.  However, it’s important for all of us to evaluate where the concentration risks in our businesses are and identify ways to mitigate downside exposure.

Have a great weekend everyone! Remember, please send me your feedback on what you would like to see with the ROND Report going forward.

2018-01-26T11:22:57+00:00

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