Concentration
Concentration measures how much of the business depends on how few customers, on resolved parents, by top-N share and HHI.
Also Customer concentration · Top-10 share · Herfindahl–Hirschman Index · HHI
Concentration is measured on MRR at month end, over resolved parent entities, comped excluded. Reported as top-10 share, top-20 share, a Herfindahl–Hirschman Index over revenue shares, and the trend of all three.
- Formula
top-N share = Σ MRR of the largest N customers ÷ total MRR · HHI = Σ share² · effective customers = 1 ÷ HHI- Unit
- % · index from 0 to 1
- Bounded
- HHI between 1/n and 1
- Defaults
- MRR basis · resolved parents · comped excluded · warn at top-10 > 40%, top-20 > 60%, HHI > 0.15
- Biggest lever
- Entity resolution — billing accounts understate risk, always
- Read with
- Customer — the measured unit · ACV and ARPA · ARR
- Appears in
- Diligence · Lender covenants · Risk-factor disclosure
- Switches
- 3 · 0 locked — see the choices
What it measures
Concentration is a measure of fragility: how much of the business depends on how few relationships. It is the reason two companies with identical ARR, growth and retention can carry entirely different risk.
Top-N share is intuitive and answers “how exposed are we to the largest few?” HHI is less intuitive and answers something top-N cannot: how is revenue distributed across the whole book? Two businesses can share an identical top-10 share while one has a smooth tail and the other a cliff, and HHI separates them because every customer contributes.
The resolved-entity requirement is not a technicality here. Concentration computed on billing identifiers systematically understates risk, because the subsidiaries and product-level accounts of one large relationship are counted as separate customers. It is the metric most flattered by skipping entity resolution.
How it is computed
At the measurement month, take every active customer’s MRR (comped excluded), sorted descending.
- Top-N share = Σ MRR of the largest N ÷ total MRR. Reported for N = 10 and N = 20.
- HHI = Σ (each customer’s share of total MRR)². Ranges from near 0 (a very large number of equal customers) to 1.0 (a single customer). A book of n equal customers has HHI = 1/n, which gives the index an intuitive reading: 1/HHI is the “effective number of customers” — the count of equal-sized customers that would produce the same concentration.
- Trend — both shares and HHI computed for every month, so the direction is visible. Direction usually matters more than level: a business whose top-10 share is falling as it scales is de-risking, whatever the absolute number.
Each customer’s ranked line also carries its tenure, which distinguishes a large customer of six years from a large customer of six months.
Worked example
Two books, each with total MRR of 100,000 and a top-10 share of 60%:
| Book A | Book B | |
|---|---|---|
| Largest customer | 12,000 | 45,000 |
| Customers 2–10 | ~5,300 each | ~1,700 each |
| Remaining tail | 40 customers | 40 customers |
| HHI | 0.043 | 0.222 |
| Effective customers | ~23 | ~4.5 |
Identical top-10 share; entirely different risk. Book B loses 45% of its revenue if one relationship ends. Top-N alone would have called them equivalent — which is why HHI is reported alongside, and why the threshold of 0.15 flags Book B and not Book A.
The choices that change the number
- The measurement month. A spot measure. A month containing an unusual billing event distorts it; the trend view exists to prevent that from being read as a change in structure.
- MRR versus total revenue. Measured on MRR here. A business with concentrated services revenue may look diversified on this measure while carrying real customer concentration in its total P&L — worth checking separately when services are material.
- Entity resolution boundaries. As above: the dominant lever, and the one most often unexamined.
- Comped exclusion. Comped customers would otherwise dilute shares while contributing no revenue.
How it is misread
Top-10 share quoted without HHI. Blind to tail structure, as the worked example shows.
Concentration on unresolved billing accounts. Understates risk, always.
Level read without trend. A 45% top-10 share that was 70% two years ago describes a business actively diversifying. The same 45% rising from 30% describes the opposite. The number is identical.
Ignoring tenure. Concentration in long-tenured, contractually committed relationships is a materially different risk from concentration in recent wins — and neither the share nor the index distinguishes them, which is why the ranked table carries tenure.
What it cannot tell you
Concentration measures dependence, not fragility of the dependence. A single customer at 40% of revenue on a five-year contract with switching costs is a different exposure from 40% on a monthly rolling agreement, and the index cannot see the difference. Nor does it capture correlated concentration — twenty independent customers in one sector, on one platform, or serving one end-market will behave as a bloc that the customer-level index reads as diversified.
How to state it
A disclosure that travels with the number. Replace the braces; keep the parenthesis.
Top-10 share {x}% · HHI {y} · effective customers {z} (SoF Standard v1.0: month-end MRR · resolved parents) Before you quote it
- Computed on parents, not billing accounts?
- HHI beside top-N share?
- Trend shown, not just level?
- Tenure and contract terms alongside?
Related questions
- How is customer concentration calculated?
- On month-end MRR over resolved parent entities, comped excluded: the share of the largest ten and twenty customers, and a Herfindahl–Hirschman Index over every customer's share. Computed on billing identifiers instead of parents it systematically understates risk, because one relationship's subsidiaries count as several customers.
- Why report HHI alongside top-10 share?
- Because two books can share an identical top-10 share while one has a smooth tail and the other a cliff. HHI sums the squared revenue share of every customer, so it sees the whole distribution, and its reciprocal is the effective number of equal-sized customers that would produce the same concentration.
- How much concentration is too much?
- The standard flags a top-10 share above 40 percent, a top-20 share above 60 percent and an HHI above 0.15, as prompts for attention rather than verdicts. The common "10 percent rule" — one customer above a tenth of revenue — comes from public-company disclosure practice and lender ineligibility limits, and is a reason to look, not a ceiling.
- Is a large customer on a long contract still a risk?
- The index cannot tell. Forty percent from one customer on a five-year contract with switching costs and forty percent on a monthly agreement read identically. That is why the ranked table carries tenure, and why contract terms are read alongside.
- Should concentration be measured on revenue, ARR or gross profit?
- This standard measures it on MRR. A business with concentrated services revenue can look diversified here while carrying real concentration in its P&L, so where services are material check total revenue too. Gross-profit concentration is a further cut when cost to serve differs by customer.
- How do buyers treat concentration?
- As a fragility to price: through the multiple, or through earn-outs, escrows and holdbacks tied to the large relationship. The number they use is computed on resolved parents over the tied-out revenue file, which is why a seller should know both the top-N shares and the HHI before diligence begins.
Strategy of Finance. “Concentration.” SoF Standard Definitions v1.0 (2026-09-18). https://www.strategyoffinance.com/standards/concentration/