Effective number of customers

The effective number turns HHI into something a board can picture. A base of 510 customers with an HHI of 0.17 has an effective number of six: it behaves, for risk purposes, like a business with six equal customers. It is the most useful single figure for tracking the concentration of one book over time and for comparing books of different sizes.

How it is computed

One divided by the sum of squared revenue shares across all customers.

Example

A base of 510 customers where one holds 41 percent has an index of 0.17 and an effective number of six. It behaves, for risk purposes, like a business with six equal customers.

Where it goes wrong

Reported without the top shares beside it. The effective number is the summary; the largest customer's name is the explanation.