There are many potential benefits of diversifying your products, services or markets, but only if your business is ready to branch out.
Diversification occurs when your business adds new products or services to its offerings, uses its existing processes to open up another client pool, or starts another business alongside your original one. It can happen concentrically (adding products and services that are similar to your existing lines) or horizontally (adding totally different products and services).
Why would you diversify? There are a number of good reasons to do so:
To create additional income streams
We’ve all heard the saying “Don’t put all your eggs in one basket.” If you have more than one income stream, you still have a source or two if one of those streams dries up. You should particularly consider this if you are a single player in a new market. Eventually, someone will notice what you are doing and copy it. Your monopoly will disappear, and income from that area will decrease. It’s just part of the ebb and tide of business. If you work on additional streams early on, you won’t find yourself floundering when this happens.
To create new challenges and opportunities for growth
Small business owners need to concentrate on the day-to-day running of the business to ensure it succeeds, but not at the expense of exploring new opportunities. Diversifying your product lines or services by adding in something similar to what you already do can give you the kick of a new challenge without necessarily letting your existing business slide.
To manage your revenues if you have seasonal or cyclical products
When your products or services are only attractive to customers at a particular time of the year, you leave yourself open to having a lean period every time your off-season comes around. If you sell ice-cream in summer, for instance, you might try selling coffee in winter. Or you might do something completely different.
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To make your company more appealing to more potential customers
You can diversify your customer base in two ways – first, you could simply look further afield for customers who would be interested in the products and services you already offer, and market to them. Second, you could offer new products and services that would appeal to a different market.
As a planned growth strategy
Perhaps it was always in your business plan to diversify once your business got going. If that’s the case, do it. As a growth strategy, diversification is definitely a winner – especially if you’ve already planned for it.
A word of caution though – while diversification sounds like a great idea, if your core business is not yet sound and profitable, you should put diversifying aside. Having a core business that you can step away from is a necessary criteria for a small business owner looking at diversifying – otherwise, while you are working on new things, your core business could falter and you could end up dropping all the balls.
Have you tried to diversify your business? What benefits – or challenges – did you experience?