What is diversification?

At its simplest, product diversification is a strategy employed by a business to increase its profitability and achieve a higher sales volume from new products, sometimes called niches. It can occur at the business level or at the corporate level.

  • Business-level product diversification– Expanding into a new segment of an industry in which the company is already operating in.
  • Corporate-level product diversification – Expanding into a new industry that is beyond the scope of the company’s current business offering.

There are four varieties of diversification strategy that businesses can use in their approach . These are as follows:

  • Concentric – adding new products to its existing product lines to attract new customers
  • Horizontal – providing new and unrelated products or services to existing consumers (i.e. notebook manufacturer offers pens)
  • Vertical – when a business expands by acquiring another company that operates before or after them in the supply chain 
  • Conglomerate – a company seeks to develop by adding totally unrelated products and markets to its existing business

Benefits of diversification?

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.

Increased sales and revenue

One of the most appealing benefits of diversification is the increase in sales and revenue a new market can provide. A new product or service can bring with it a new opportunity for growth.

Less vulnerability

If a small business is reliant on a few large customers for their revenue, it leaves them in a vulnerable position should one of these customers leave. As diversification has the potential to tap into a larger customer base, even without significant growth, it can provide an opportunity to cushion the blow from losing a primary customer.

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 60% of your money in that product, you’d still have 40% of it to work with.

Best Practices for Diversification

Understand your market

Conduct ample market research. Read up on your potential competition, new means of distribution, and the skillset you’ll need in place to bring it to new markets. And be mindful of the timing, too, especially amid the COVID-19 pandemic.

Don’t undersell yourself

Say you’ve generated some interest with a new product line and a potential customer wants to work with you. You’re excited and you impulsively quote the lowest price just to get them on board. It’s best to research the competition and determine a far market value for the new service. Otherwise, you get yourself off to a bad start.

Let us help you analyze and improve your product diversification and risks. Call Kelly at (320) 214-2959 for an  initial consult.