CFA Level I · CFA Level I Exam · Business Models
A company sells subscription software and relies on a single large customer for most of its revenue. Which risk to its business model is most likely heightened by this feature?
Customer concentration risk is most likely heightened. When one large customer provides most revenue, losing that customer or having it demand lower prices would severely damage the company's revenue and cash flows, whereas inventory and commodity risks do not arise from this feature.
- ACustomer concentration riskCorrect
- BInventory obsolescence risk
- CCommodity price risk
Explanation
Dependence on one customer for most revenue exposes the model to customer concentration risk: losing or renegotiating with that customer would sharply cut revenue. Inventory and commodity risks are not linked to a software subscription business.
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