In virtually every CIM and VDD doc that I read recently (for B2B business, at least), an early page highlights a set of corporate logos of the target company’s key customers. Logos for large, well-known businesses are great; logos for significant and “cool” customers – those that are recognized as movers and shakers – are expressed boldly to help create “lift.”

Of course, large customers can be a very positive sign for a business. They typically make large purchases (driving significant revenue), have high-quality standards, and are often early adopters of new technology.

However, the real economic picture is not always as positive.

Take a recent case that we worked on. The target was a SaaS business, which had almost exclusively focused on winning large, “marquee” clients. Initially, this proved successful – the incremental revenue from each new contract win was substantial. But quite quickly (within the typical hold period of a PE fund), the dynamic had changed. At contract renewal, those large clients deployed equally large procurement teams to significantly reduce pricing. And whilst the target had been busy serving those large clients, other new competitors had emerged to serve the less price sensitive SME market. The target was left with little room for growth, and steadily eroding margins.

When next faced with that page of logos, here are some questions that might help you to uncover some hidden risks:

1. Is the target really a valued partner? We like to ask: “If the customer assembled a page of logos for their key suppliers, would this target be on it?” If yes, then great. But if not, you should question whether the individual who is really buying from the target has enough organizational power to increase spend on the item over time (or even maintain spend in the face of pressure from Procurement to reduce prices).

2. Are they picking winners? At face value, a set of logos might look impressive. But it’s always worth asking: “Who is missing from the list? And why?” I have seen plenty of examples where, on closer examination, a client list might be a set of fading giants – and maybe a competitor or alternative solution is capturing the lion’s share of growth with even more attractive customers.

3. Is the “trickle-down” effect real? Lots of growth theses assume that a target can extend its reach from one customer segment to another – for example, from Enterprise to SME accounts. All too often, we find that the assumption does not hold true – different customer segments have very different preferences in terms of product specs, sales support and technical service.

Happy deal making! And remember – always be on the lookout for the worst cases of “Logo Inflation.”

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