Under what condition might customer concentration risk be deemed manageable?

Customer concentration risk refers to the potential financial loss a company faces if it loses a significant customer or a small group of customers that account for a large share of its revenue. When this risk is managed effectively, it means that the company has taken specific steps to mitigate the potential negative impacts associated with this concentration.

The scenario where irrevocable long-term contracts are in place signifies that the company has a secure, guaranteed revenue stream from its major customers over an extended period. These contracts bind the customers to maintain their business relationship, reducing the likelihood of sudden revenue loss. This security provides stability, allowing the company to better predict its financial outcomes and plan for the future, which is a crucial aspect of managing customer concentration risk.

In contrast, high market competition does not directly alleviate customer concentration risks, as it may still lead to customer defection. Short-term contracts can introduce more volatility and uncertainty since they can be terminated easily, leaving the company vulnerable. Frequent changes in product offerings could distract from maintaining stable relationships with existing customers and increase the risk of losing them if they are not satisfied with the changes.

Thus, irrevocable long-term contracts create a reliable framework within which businesses can operate, making customer concentration risk manageable.