Portfolio Concentration Risk: The Hidden Threat to Your eCommerce Business

The Financial Concept That eCommerce Ignores

In finance, portfolio concentration risk is taken seriously. No competent investor puts 90% of their money in 5 stocks. That's not investing - that's gambling.

Yet in eCommerce advertising, this is exactly what happens every day:

• 90% of your revenue comes from 20 products
• One product goes out of stock → 15% revenue drop
• Competitor undercuts your top SKU → 22% revenue loss
• Seasonal demand shifts → top products stop converting

This is portfolio concentration risk. And it's the most overlooked threat to eCommerce growth.

What Is Portfolio Concentration Risk?

Portfolio concentration risk is the vulnerability that comes from over-dependence on a small number of products for business outcomes.

In traditional portfolio theory, it's measured by:

Concentration Risk = Impact of Single Asset Failure × Probability of Failure

For eCommerce, we adapt this to:

Revenue Concentration Risk = 
  (Revenue from Top N Products ÷ Total Revenue) × 
  (Probability of Disruption)

The Herfindahl-Hirschman Index (HHI) for Products

Economists use the HHI to measure market concentration. We can use it for product portfolios:

HHI = Σ (Market Share of Product i)²

For your product portfolio:

Product HHI = Σ (Revenue Share of Product i)²

Interpretation:

• HHI < 1,500: Low concentration (healthy diversification)
• HHI 1,500-2,500: Moderate concentration (some risk)
• HHI > 2,500: High concentration (significant risk)
• HHI > 5,000: Extreme concentration (business-threatening)

Real Example Calculation

Brand A (Healthy Diversification):

Product	Revenue	Share	Share²
Product 1	€50K	5%	25
Product 2	€45K	4.5%	20.25
Product 3	€42K	4.2%	17.64
... (47 more)	€863K	86.3%	...
Total	€1,000K	100%	HHI = 892

HHI = 892 → Low concentration, healthy portfolio

Brand B (Dangerous Concentration):

Product	Revenue	Share	Share²
Product 1	€350K	35%	1,225
Product 2	€280K	28%	784
Product 3	€180K	18%	324
Product 4	€90K	9%	81
... (496 more)	€100K	10%	...
Total	€1,000K	100%	HHI = 2,534

HHI = 2,534 → High concentration, significant risk

If Product 1 fails (goes out of stock, gets undercut, seasonal end), Brand B loses 35% revenue overnight. Brand A loses 5%.

The Five Types of Concentration Risk

1. Product Concentration Risk

Risk: Too much revenue from too few individual products.

Symptoms:

• Top 10 products = >60% of revenue
• Top product = >20% of revenue
• Product HHI >2,500

Example Scenario:

Your #1 product (€400K/month) is a white-label item. Competitor sources same product, undercuts by 15%. Your conversions drop 70% in 2 weeks. €280K monthly revenue evaporates.

2. Category Concentration Risk

Risk: Too much revenue from a single product category.

Symptoms:

• One category = >50% of revenue
• Limited category diversity
• Seasonal categories dominating

Example Scenario:

Fashion brand with 80% revenue from "Winter Coats." Warm winter hits Europe. Sales drop 40% for 4 months. No other categories scaled enough to compensate.

3. Supplier Concentration Risk

Risk: Top products all from same supplier.

Symptoms:

• >60% of revenue from one supplier's products
• Single point of failure in supply chain

Example Scenario:

Your top 5 products (€650K/month combined) all come from Supplier X. Supplier X has quality issues, faces 6-week delay. You have no alternatives ready. Revenue drops €650K for 6 weeks = €3.9M loss.

4. Price Point Concentration Risk

Risk: Revenue clustered in narrow price band.

Symptoms:

• >70% of products in same price tier (e.g., €50-€100)
• No portfolio pricing diversity

Example Scenario:

Economic downturn. Your products are all premium (€200-€400). Consumers trade down to €50-€150 range. Competitor with diverse pricing takes your market share.

5. Customer Segment Concentration Risk

Risk: All winning products appeal to same customer type.

Symptoms:

• All top products serve one demographic
• Single customer psychographic
• Narrow use case

Example Scenario:

All your winning products target "professional women 30-45." Facebook/Google ad costs for this audience rise 60% due to competition. Your CAC becomes unprofitable. You have no products tested for other segments.

How to Measure Your Concentration Risk

Step 1: Calculate Your Concentration Metrics

Pull 90 days of product revenue data. Calculate:

A. Top-N Revenue Concentration

Top 5 Concentration = Revenue from Top 5 ÷ Total Revenue
Top 10 Concentration = Revenue from Top 10 ÷ Total Revenue
Top 20 Concentration = Revenue from Top 20 ÷ Total Revenue

Benchmarks:

• Top 10 <40%: Healthy
• Top 10 40-60%: Moderate risk
• Top 10 >60%: High risk

B. Product HHI

For each product: (Revenue Share)²
Sum all products: HHI

(Use spreadsheet formula: =SUMXMY2(revenue_range, revenue_range) / (SUM(revenue_range))^2 * 10000)

C. Category HHI

Same calculation but by product category instead of individual products.

D. Gini Coefficient

Measures inequality in revenue distribution:

• 0 = Perfect equality (all products same revenue)
• 1 = Perfect inequality (one product all revenue)
• >0.7 = High concentration risk

Step 2: Assess Disruption Probability

For your top 10 products, score disruption risk (1-10):

• Stock risk: Single supplier? Long lead times? Low inventory?
• Competition risk: Easily replicable? White-label? Commodity?
• Seasonal risk: Seasonal product? Trend-dependent?
• Pricing risk: Price-sensitive market? Race to bottom?
• Platform risk: Dependent on one channel (Amazon, Google)?

Example scoring:

Product	Revenue Share	Stock Risk	Comp Risk	Season Risk	Price Risk	Total Risk	Weighted Risk
Product A	28%	8	7	3	9	27/40	7.56
Product B	18%	4	5	8	6	23/40	4.14

Portfolio Disruption Risk = Σ (Revenue Share × Total Risk Score)

If score >5.0, your portfolio is highly vulnerable.

Step 3: Stress Test Scenarios

Model what happens if key products fail:

Scenario 1: Top Product Loss

Impact = Current Revenue × Top Product Share × (1 - Replacement Rate)
Example: €1M × 0.25 × (1 - 0.3) = €175K monthly loss

Scenario 2: Top Category Loss

Impact = Current Revenue × Top Category Share × (1 - Replacement Rate)
Example: €1M × 0.45 × (1 - 0.2) = €360K monthly loss

Scenario 3: Supplier Disruption

Impact = Revenue from Supplier × Duration (months) × (1 - Alternative Supply Rate)
Example: €600K × 3 months × (1 - 0.1) = €1.62M total loss

Real Case Study: Concentration Risk Realized

Company: Electronics accessories retailer
Catalog: 340 products
Revenue: €2.1M/month
Problem: High concentration risk ignored

Portfolio Before Crisis:

• Top product: €680K/month (32% of revenue)
• Top 5 products: €1.5M/month (71% of revenue)
• Product HHI: 3,247 (high concentration)
• All top 5 products: Same price tier (€80-€120)
• All top 5 products: Same category (phone accessories)
• All top 5 products: Same supplier

Crisis Event:

October 2023: New iPhone released with USB-C instead of Lightning. Their top product (Lightning cable adapter, €680K/month) became obsolete overnight.

Cascade Effect:

• Month 1: €680K product drops to €90K (-87%)
• Month 2: Related products (cases designed for Lightning) also drop -40%
• Month 3: Total revenue down to €1.1M (-48%)
• Month 4: Company lays off 30% of staff
• Month 5: Unable to recover, considering closure

What Diversification Could Have Done:

If they had maintained concentration <50% (top 10 products = €1.05M instead of €1.5M):

• Lightning adapter loss: €680K
• Remaining top 9 products: €820K (still intact)
• Next 50 products (properly scaled): €850K
• Total: €1.67M revenue maintained (-20% instead of -48%)
• Survivable with some cuts, not catastrophic

The Diversification Playbook

Strategy 1: Forced Diversification Through Budget Caps

Implement product-level budget caps to prevent over-concentration:

• No single product can receive >15% of total ad spend
• Top 5 products combined capped at 45% of spend
• Excess budget automatically flows to next-tier products

This artificially limits concentration even when algorithm wants to concentrate.

Strategy 2: Category Quotas

Set minimum spend by category:

• Category A (largest): Max 40% of budget
• Category B: Min 20% of budget
• Category C: Min 15% of budget
• Category D: Min 10% of budget
• New categories: Min 5% of budget

Forces cross-category diversification.

Strategy 3: Portfolio Rebalancing

Like a financial portfolio, rebalance quarterly:

1. Calculate current concentration
2. Set target: Top 10 = 50% of revenue
3. Current: Top 10 = 68% of revenue
4. Action: Reduce budget on top 10 by 20%, redistribute to next 40
5. Monitor for 60 days
6. Repeat until target reached

Strategy 4: Resilience Index Development

Create a "Portfolio Resilience Score":

Resilience Score = 
  (Product Diversity Score × 0.30) +
  (Category Diversity Score × 0.25) +
  (Supplier Diversity Score × 0.20) +
  (Price Tier Diversity Score × 0.15) +
  (Disruption Risk Score × 0.10)

Target: Resilience Score >7.0/10

Track monthly and report to leadership.

Strategy 5: The 40/30/20/10 Rule

Revenue distribution target:

• 40%: Top 20 products (core winners)
• 30%: Next 50 products (growth portfolio)
• 20%: Next 100 products (developing)
• 10%: Long tail (discovery + stability)

Adjust spend to move toward this distribution.

The CFO Conversation

Finance teams understand concentration risk. Frame it in their language:

"Our current portfolio has a Product HHI of 3,400, indicating high concentration risk. If our top product fails (stock out, competitor entry, or seasonal shift), we face a 28% revenue impact = €336K monthly loss. By diversifying our ad spend to reduce HHI to <2,000, we decrease single-product failure impact to 12% = €144K monthly loss. This $192K risk reduction costs us approximately €30K in short-term ROAS efficiency during the 90-day diversification period. ROI on diversification investment: 640% over 12 months through risk mitigation alone, not counting upside from discovering new winners."

CFOs love:

• Risk quantification (HHI, disruption probability)
• Stress testing (scenario modeling)
• ROI of risk mitigation
• Portfolio theory (familiar framework)

Monitoring Dashboard

Track these metrics weekly in a concentration risk dashboard:

Metric	Current	Target	Status
Product HHI	2,847	<2,000	⚠️ At Risk
Top 10 Revenue %	64%	<50%	⚠️ At Risk
Category HHI	1,680	<1,500	⚠️ Moderate
Active Products	87	>150	❌ Poor
Disruption Risk	6.8/10	<5.0	❌ High
Resilience Score	4.2/10	>7.0	❌ Poor

Action Plan

Immediate (This Week):

1. Calculate your Product HHI and Top 10 concentration
2. Identify if you're at risk (HHI >2,500 or Top 10 >60%)
3. Run disruption risk assessment on top products

Short-term (Month 1):

1. Implement product-level budget caps
2. Create category quotas
3. Start exploration budget (20-25% of spend)
4. Build concentration risk dashboard

Medium-term (Month 2-3):

1. Monitor concentration metrics weekly
2. Gradually rebalance portfolio toward targets
3. Identify and scale product alternatives for top SKUs
4. Develop supplier diversification plan

Long-term (Month 4-12):

1. Achieve target HHI <2,000
2. Maintain Top 10 concentration <50%
3. Establish quarterly rebalancing process
4. Build portfolio resilience into KPIs

Concentration risk is the silent killer. High ROAS feels good - until the day your top product fails and 30% of revenue disappears.

Diversification feels expensive - until you survive a disruption that killed your concentrated competitors.

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Want to assess your portfolio concentration risk? We offer free Portfolio Risk Assessment that calculates your HHI, disruption probability, and provides a custom diversification roadmap.