Single Source Dependencies

One of the worst things you can be in business is what’s called, “Single Source Dependent”.  This is something that can take many shapes, but it essentially means that a vital input into your business comes from a single place or source.

This is going to largely be a conversation about risk mitigation because this is a pretty critical issue for people who are new to running a business or who haven’t really thought through the way that they “get” their key inputs into their business.

Let’s start by talking about inputs.

When it comes to your business, you have a bunch of inputs that help you produce goods or services that you sell to customers.  For the sake of this conversation, I’m going to pretty much focus on online businesses but some of the inputs like “traffic” are the same irrespective, they just might go by a different name.

Ok, so we’ll start with traffic.  In your online business, traffic is the lifeblood of your business.  If you don’t have people coming to your website or hitting your sales pages, then you don’t really have an online business.

But where do you get your traffic from?

I talked last week about the site “LittleThings” and how they primarily got most of their traffic from Facebook and when FB made an algorithm change in early February, it turned basically tanked the entire business.

They were largely single source dependent on getting their best converting and monetizable traffic from Facebook.  The change didn’t even turn off the entire flow of traffic, it reduced it by 75% and that was enough to basically send their entire business off the cliff.

It could just as easily have been SEO traffic or even paid traffic sources like Google and Facebook PPC – if you’re getting the vast majority of your traffic from one place, you’re business has a single source dependency risk.

Related to that is your lead flow.  Leads come from various places and online they are obviously a byproduct of a particular traffic source.  But you could have multiple traffic sources and the vast majority of your leads end up coming from one particular source.

Again, I’ve seen this happen a lot – people get traffic from ads, organic, referrals, a podcast and a litany of other places, but 80% of their new leads come from one source.  Then something happens to that source and their lead flow dries up.

In many of these cases, the person doesn’t know what’s happened because they are not associating leads with sources, so the first step to mitigating that risk is having better tracking in place.  Knowing your data is imperative.

Once you see that 80% of your leads are coming from one lead magnet on one page from one referring site, you can deal with that issue.  If you don’t know, you’ve got zero chance of fixing the problem.

Another interesting single-source dependency that some businesses face relates to people.  This is often referred to as a “key man dependency” where if that one person didn’t turn up or was suddenly no longer available, your business would cease to operate.

In most online businesses and especially side hustle businesses, the key man risk lies with the owner.  If the business owner gets sick or goes on vacation, nothing happens and business grinds to a halt.

The obvious way to mitigate that risk is to build up a team of people in your business, but that’s not actually the best answer.  The better answer is to establish strong processes and document the way your business functions so that you can more easily extract yourself from the business.

The side benefit to this is, that should you ever want to sell your business, having everything documented is a lot more attractive to a potential buyer.

A related risk to a key man dependency is being cuckolded to a supplier.  When your business gets the bulks of services or products from a single supplier, that’s a substantial risk.

We see this in our content business quite a bit.  We have customers that come to rely on us to provide them with content for their sites and in some cases, their customers.  But like any supplier, we sometimes have resource constraints in our business and can’t always provide the volume of content in the time that the customers want.

I’ve lost count of the number of times that I’ve had our clients be told that the lead time on delivery of their work is 10 days and then they send us emails telling us that they absolutely must have it in 3 days because of some reason or another.

We try to accommodate everyone, but sometimes we just can’t and every so often a client doesn’t handle that very well.  They pull their business, go to another provider and effectively become single source dependent on them.

It’s not just services, you see this a lot with dropshippers and eCommerce stores where they are reliant on one supplier they found on Alibaba to manufacture and deliver their product but then that supplier vanishes.

This risk can be harder to manage.  Like anything else, the key is to identify the risk and figure out if there are other suppliers you can use to spread the work across and ensure you’re covered in case one changes their terms or disappears from the face of the earth.

The last one I’m going to talk about is what I think is the granddaddy of all of the single source dependencies… Revenue.

If you have a single revenue source, whether it’s a marketplace like Udemy, one big customer, an affiliate program that pays well or even something like a job, you have a significant risk.

Yes, your job can be a risk.

One of the reasons that I am such a big fan of creating a side hustle is because it goes some way to mitigating the risk of your employer wishing you the best in future endeavours.

With many online businesses, they have a single primary source of revenue.  If something changes that’s beyond their control, it adds a layer of risk to their business that they may not be able to handle.

The way to deal with that is to create multiple products, have multiple ways of selling to your customers and not being exposed to any single platform for the overwhelming majority of your revenue.

That’s not to say that from Day One you should start running around and doing a bunch of different things.  That’s dumb.  You don’t want to be mediocre across five revenue sources.

When you’ve nailed down your primary source of revenue, then you can use that as a springboard to diversify from a position of strength.

And to be honest, that’s true of all of those things.  You want to get good at one thing and then expand and evolve from there.  Use your primary source as the foundation off which to grow.

The problem is, people get complacent or they don’t notice the point of diminishing returns.

Complacency happens when everything becomes easy.  Your mind thinks, “I’ve done the hard yards, now I’m going to coast and enjoy the fruits of my labour.”  Unfortunately, these people almost ALWAYS get blindsided when their single source dependency risk comes home to roost.

The point of diminishing returns occurs when people continue to work on growing their single source and they expend more effort but the growth that comes out the back of it gets increasingly smaller.  At this point, it would be better to spend that effort on diversification because once the initial investment is made, the return will be higher.

You need to think of the best way to ring-fence yourself from things beyond your control.  It’s like having a castle – you build walls, then you fortify them, then you dig a moat, you turn the bridge into a drawbridge and finally you fill the moat with alligators with bees in their mouths so that when they go to bite someone they shoot bees at them…

Ok, that last part might be taking it a bit too far, but you get the gist.

Build your business to last and when you see risks, think about how to add a layer of sustainability.

Nobody else is going to protect you, so you need to dig in and figure this out on your own.

Leave a Comment