Smart diversification may help organizations to establish alternative sources of revenue and reduce their reliance upon a single product, customer base, or geographic area. In addition, diversification allows an organization to be less vulnerable to economic downturns in their primary markets, since they have secondary options. While random expansion into unknown markets is risky and usually unsuccessful, smart diversification should focus on the strengths of the organization, its capabilities, and its customer base. To develop and implement smart diversification, you need to follow a systematic approach to identifying diversification opportunities, test diversification opportunities at minimal risk levels, and then build on successful diversification opportunities.
1. Identify and Expand Product/Service Options That Are Built Upon Current Strengths of the Organization
Diversification opportunities that are most likely to be successful are generally built on the existing strengths and capabilities of the organization. Reducing the initial cost of entering a new diversification opportunity is enhanced by utilizing the current customer base and building upon the existing systems and processes of the organization.
Possible sources of new products/services include:
- The development of services that support current products
- Offering price tiers to separate the customer base for increased average order values.
A large number of product/service ideas can also be developed directly from customer requests and recurring problems.
2. Determine Which Method Of Diversification Is Best For Your Organization
There are many ways to achieve diversification – product, market and channel. Each type of diversification has different risks and investments. Success in diversification depends on choosing a method that fits within the capability of your organization and the expected demand for the new product/service.
Common methods of diversification include:
- Developing new products for your existing customers
- Selling the same product to new segments of the customer base
- Creating new sales channels (e.g., partners, online, resellers)
- Offering a subscription/recurring product/service option for steady, predictable income
Choosing the appropriate method of diversification is key to a successful diversified business model.
3. Test Small Before You Expand
Successful diversification starts with the creation of pilot programs that allow for meaningful learning experiences. Testing pilots in small ways minimizes the risks associated with introducing new products/services and protects an organization’s brand equity.
Ways to conduct pilot testing include:
- Conducting pre-sales to measure demand for a new product/service
- Offering limited-time promotions to gauge interest
- Releasing a new product/service in one geographic area/customer segment before releasing in other geographic areas/customer segments
- Monitoring profit margin, customer churn, and support requirements
It is vital to either receive a favorable outcome or obtain valuable information from a pilot program to avoid expensive mistakes.
4. Create a Portfolio of Diversified Streams of Income
Having multiple revenue streams is a good thing, but successfully managing them requires discipline. Multiple revenue streams should be treated like a portfolio with clear objectives.
Guidelines for managing a diversified portfolio include:
- Discontinuing the sale of a product/service with poor profit margins and/or high support requirements
- Increasing investment in product/services with high repeat business
- Assigning responsibility and performance expectations to each individual or group responsible for generating a revenue stream
Managing multiple revenue streams as a portfolio will enable an organization to maintain consistent, scalable revenue growth.
Conclusion
Smart diversification is a viable way to improve an organization’s growth and reduce its dependence on a single source of revenue. The most effective way to realize this goal is to develop diversified streams of revenue from your organization’s existing strengths, determine a clearly defined path of diversification, test your ideas through pilot programs, and apply a structured portfolio management plan to the diversified streams of revenue. When accomplished properly, diversified revenue streams are a strategic asset that enables an organization to produce consistent and predictable revenue growth, while at the same time, significantly decreasing the likelihood of chaos.