Customer Concentration in Healthcare
It's essentially a rite of passage for healthtech companies to go through some period of life with relatively high customer concentration (e.g. >25% of revenue coming from one or a small fraction of customers).
A reality of the healthcare industry is that the number of potential customers for a B2B business is finite, and generally lower than what you'd see across other verticals that a “generalist” tech company might sell into. Specifically, in the U.S, there are:
~6,000 hospitals (or ~400 health systems)
~2,000 payors (but really only ~50-100 of consequential size)
~1,000 major pharma companies (of which ~50 represent the majority of market share)
…compared to ~30M total companies (of which ~20,000 have greater than 500 employees) across all verticals that generalist tech companies can sell into
The one exception in healthcare is selling health benefits to employers, for which the addressable market could comprise millions of companies... but in general, the healthcare end market itself is highly concentrated relative to other tech industries.
Some well-known examples of iconic healthcare companies that exhibited high customer concentration at a point in time are as follows:
Veeva - their top 10 customers represented 61% of revenue in 2012 [Source]
R1 - Ascension represented 60% of revenue in 2021 [Source]
Castlight - Anthem represented 27% of revenue in 2019 [Source]
Signify - 3 customers comprised 61% of revenue in 2022 [Source]
Inovalon - in 2014, 10 customers comprised 76% of their revenues [Source]
In many cases, high customer concentration lasts for several years; for instance, in fiscal year 2024, Veeva’s top 10 customers still accounted for 28% of total revenues (that’s ~$644M revenue across only 10 customers!).
What this means for company building
A deeply entrenched relationship with a large customer has its merits - the main one being the ability to significantly expand within the account, which is generally more efficient and less costly than acquiring a net new customer. It's not rare to see a healthtech company derive the majority of its revenue in a given quarter or year through expansion within existing customers versus from net new logos.
But, of course, reliance on a small number of customers for a significant portion of your revenue comes with obvious pitfalls - e.g. churn risk, investor hesitation, and customer leverage to exert control over your roadmap.
If you develop a large relationship with a single customer, it can be worth leaning into (and an inevitability) as long as you keep the following things in mind:
Prioritize opportunities that take advantage of your current roadmap over future roadmap, so you maintain a degree of ball control over the relationship.
Do constant discovery and validation of product concepts with other potential buyers to ensure that your offering is not being overengineered to that customer.
Focus on making that one customer highly referenceable.
Don't stop developing your sales pipeline to diversify your base!
Also consider the following questions that investors will have if your business exhibits high customer concentration:
Is / are your biggest customers happy reference customers? What is the level of churn risk?
Is it / are they truly representative of a broader addressable market to which we can underwrite?
Is the product and go-to-market motion generalizable to the broader market?
How credible / qualified is your sales pipeline of prospects beyond that one / small handful of highly concentrated customers?
Rather than needing to derisk every one of these points, it’s best to explicitly acknowledge the customer concentration risk (and educate the investor on the structural realities of the healthcare industry per above!), and articulate your theses on how you believe you can mitigate these risks over time.
