Diversification 101: How to maximise profitability with new customers

26 February 2018

Diversification, at its core, is the art of doing something different with your business in order to grow, increase your sales and improve revenue.

From developing a new product to expanding into a new market, the process of diversification can be used both as a growth strategy and to keep the company viable.

Choosing to diversify your business beyond its initial idea opens you up to plenty of advantages, but there are significant risks involved too. Here, we’ll give you a crash course on diversification, touching on its advantages, perceived risks and the best practices you can implement to help maximise profitability with new customers.

Strategies and best practices

sme employees conducting meeting

Recognise your limits

If you’re thinking about beginning a process of diversification, then consider what you have to invest, both in terms of finance and the resources that are available to you. In doing so, you’ll have to look into the initial funds you need to begin diversifying, as well as the ongoing funds that are required to support expansion, hire new employees and provide them with a salary.

Knowing your limits means you’re aware of what needs to be done and how much you’re willing to put into the process of diversification.

business team discussing processes

Ensure the process creates value

Your existing customers may question or be confused by your brand name appearing on new products or in unfamiliar markets. Ensuring that the new offerings still create value for the customer is an important area to focus on. If your service or product can provide your customers with something they can use regularly, it’ll help to strengthen these areas you’re diversifying into and improve their chances of viability.

Perhaps you can tweak your current service in order to sell to a new group of users. If your item is a ‘high-end’ product or service, could you provide a more affordable version?

leader sharing diversification ideasleader sharing diversification ideas

Move both horizontally and vertically

Identifying the possibilities afforded to your business through diversification is an integral part of the decision-making process. Consider where your business is, and identify the horizontal and vertical movements that can be made.

When it comes to vertical diversification, ask yourself how much further you can do what you’re currently doing. In your particular area, what can you do to improve and provide even more value to your customers? Is there a way to streamline and strengthen your current product or service in order to move to the next stage and appeal to a new group of customers?

When thinking horizontally, weigh up what your competitors are doing that you may not be. When looking at the niche or area you’re working in, are there any related business opportunities or similar areas you can make a move into? Look at what fits with your business and consider how you can make these new areas work for your customers.

expert speaker sharing knowledge

Be an expert in the market you’re expanding into

Once you’ve identified how you want to diversify, do you have the systems and teams in place to implement the necessary processes? Are you able to deliver them with the expertise you’ve become known for, in a manner that’s in line with your previous approaches? 

Conversely, your business doesn’t want to be in a position where you’re playing catch-up. Make sure remain abreast of all industry and competitor developments, and move ahead of the curve. This ‘early adopter’ approach means you’ll be prepared for market trends and shifts should they occur.

engaged business team

Prep your team and keep them keen

Before you move your business into unfamiliar territories, the company should be well equipped with a talented, fully-trained team that’s prepared to make the transition. Whether you strengthen your existing team or make new hires, diversification requires multi-tasking that could mean an unprepared team may be stretched thin.

In shaking up your team, it’s important to ensure they’re passionate and well-versed in the product or service. That excitement and enthusiasm gets funnelled into how they do their jobs, bringing new customers into the fold along the way. There’s a tendency to play it safe as a business, but shaking things up is common amongst many successful businesses, so don’t be afraid to rock the boat.

Advantages of business diversification

increased sales and revenue

Increased sales and revenue

Once a business is in a position where they have grasp on a significant chunk of a marketplace, it leaves little room to acquire new customers and improve upon profitability. Expanding as a business by creating a new product or entering a new market segment increases your chances for exponential growth. 

Dependency reduction

Theoretically, diversification can help to increase clients and customers. If you’re a small business that relies on only one or two large clients for most of the revenue, your business could be in a much weaker position if one leaves.

A successful process of diversification can put you in a much more comfortable position, allowing you to maintain a foundation of clients while you’re looking for a replacement.

team weighing diversification risks

It balances out the risks

Inherent to diversification is the idea that by diversifying your business’ investments, it spreads your risk in a way that if one of your investments loses value, the others won’t necessarily lose money at the same time. This provides a greater balance to your risks.

Put simply, if you invest all your money in one product and it fails, you could lose all your money. However, if you put only 20% of your money in that product, you’d still have 80%of it to work with.

Risks and criticisms

Operational stress

A diversified business could well spread itself too thin now it has more products or clients to deal with. Now that employees are required to multi-task, productivity could suffer as a result. If you’re considering diversification, then look into the effects it could have on your business’ human resources, information technology, production, finances and marketing. Critics of diversification point to the multi-layered structure of diversified companies and all the complexities they can incur.  

brand team discussing impact

Brand damage

In diversifying your business, you run a risk of diluting your message. To some customers, they might be confused that you’re now selling new things with the same brand name; others may see your move into a new market as a sign that you’re no longer a leader in your original area since you’re not specialising in a single product.

Excessive diversification

Be warned: there is such a thing as excessive diversification, which could create further risks if not handled properly. If you aren’t selective about the process, then the standards surrounding your business can become slack, as attention is spread.

meeting to analyse results

Will you have the time to pay attention to each investment? Even subtle changes in how a business operates can have a major effect – if you don’t have the time to properly take care of your diversified business then it’s a sign you’ve taken things a step too far. 

Likewise, if your portfolio is over-stocked, you run the risk of spreading your capital too thinly. At this point, even a great investment will only have a minute influence on the total value of the portfolio. As a result, some of your best ideas can become diluted.

So, it is vital that any decision to diversify is fully considered and calculated with the short and long-term in mind.   

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