In both business and life, change is inevitable. The ghosts of companies past (Blockbuster, anyone?) are gloomy reminders of what can happen when a business fails to adapt and diversify.
Product diversification — AKA adding new or modified products or services to your business offering — can be a great way to increase profits and stabilize your earnings. Like most things in business, it’s not without its risks.
Here’s what you need to know about product diversification and if it’s right for your business.
What is product diversification?
Product diversification is any change or expansion to your current product offering in order to increase sales.
In the simplest of terms: If you offer more stuff, you have the potential to sell more stuff.
Take The Coca-Cola Company, for example. While their classic coke and diet coke products are likely what first comes to mind when you think of them, they’ve diversified to sell new coke flavors, other soft drinks like Sprite and Fanta, and even Dasani bottled water. In this sense, they expanded their reach to offer a little of everything for everyone.
This isn’t the way to go for every business. Depending on your particular product, it may be in your best interest to continue to do one thing really well. However, business owners should be careful not to become complacent: There is a fine line between having a specialty and failing adapt to changing markets.
What is the importance of product diversification?
Diversifying your product offering can be a critical step in growing your market reach and increasing sales. Oftentimes, it’s also necessary for survival.
New products offer additional sources of revenue and can help to regulate cash flow throughout the year, especially if demand for your current products is seasonal. For example, a company who sells furnaces or fireplace inserts might see the majority of their sales come in during fall and winter. Without product diversification, the company would need to be sure to sell enough during the high season to carry them through slower months. Diversifying to add products that sell in summer relieves that pressure.
But beyond simply helping your company survive, diversification is a tried and true strategy for growth. As you add more products, lines, or services, you can sell more to existing customers, convert new ones, and expand into completely new markets.
Types of product diversification
Concentric diversification means expanding on a line of existing products or services to add new but related products. A company selling winter coats might pursue concentric diversification strategy by adding a lighter, fall jacket to their line.
Alternatively, horizontal diversification involves providing a new, unrelated product or service and selling it to existing customers. When clothing retailer J. Crew began selling wedding and bridesmaid dresses, they used horizontal diversification strategy to enter the bridal market.
Conglomerate diversification occurs when a company creates new products or services with no similarities to their current offering. When General Electric diversified to sell home appliances and medical devices, they practiced conglomerate diversification strategy.
How to diversify your products
Product diversification can look vastly different from business to business. Your path to product diversity will depend on, generally speaking, how much money you have to launch new products and how much of a risk you’re prepared to take. Here are some actionable steps to take once you’re ready to make the jump.
Consider your objectives and strengths
Before you take any tangible steps to diversify your products, you need to determine what your primary objective is. Are you diversifying defensively, to protect your business against slow months or competing companies? Are you diversifying offensively to seize a new market opportunity with new products? The answers to these questions will form the basis of your strategy.
A company should also determine its unique strengths before pursuing diversification. “managers need to think not about what their company does but about what it does better than its competitors,” wrote Constantinos Markides for the Harvard Business Review. “It forces an organization to identify how it might add value to an acquired company or in a new market—be it with excellent distribution, creative employees, or superior knowledge about information transfer.”
Thanks to the powers of the internet, it’s easier than ever to do the proper research you need to understand the needs of the market. While considering diversification, identify potential competitors and learn what you can about their pricing and product offerings. Consider implementing a small-scale market test to see how customers react to your potential new product, and analyze your sales and marketing efforts during the test. This will help you determine how much launching the product will cost so you can prepare accurate budgets.
Plan, budget, and assess resources
Product diversification can be costly. In order to budget accordingly, you’ll need to assess the resources — like your sales, marketing and production teams — available to you. Determine if your team already has the market knowledge and production capacity to develop the product and achieve your sales goals, or if you’ll need to invest in more infrastructure or hire more staff in order to expand. Those who feel they can’t afford internal development might consider sourcing products from other suppliers or licensing products developed by other companies.
The rewards of diversifying your products can be extraordinary — but with proper strategy and smart execution, it doesn’t need to be such a high-stakes game.
“Managers must study their cards carefully,” wrote Markides. “It takes smart players to know when it’s best to raise their bets and when it’s best to fold.”