Logan Wedgwood looks at the two most popular types of diversification as a means to mitigate risk and spread revenue.
When times are tough, it’s common for diversification to come to the top of a business’s strategic agenda as a way to mitigate risk and spread revenue. It commonly brings with it a hope for new sales.
However, it also can bring a very real challenge if not considered properly, and that is the cannibalisation of your current market and a potential breakdown of your marketing channels.
Let’s consider the two most popular diversification scenarios – product diversification (taking a new offering to your existing customers or target market) and market diversification (developing and launching a new product or service that enables you to penetrate new markets).
Both approaches have their merits and can be successful, but they differ in their additional costs when it comes to marketing.
Diversifying your products for the same market can work and be cost-effective if you can build on the relationships and loyalty that you have become accustomed to. The marketing investment here is simply that required to tell them about your new product or service but, if you’ve already been doing this successfully and have had your customer as the focus of your targeted marketing to date, you’ll already know who these people are, what they need and how they like to hear from you.
The same does not apply if your diversification is going to see you penetrate new markets. Chances are your target customer has changed and these new targets are likely quite different from your current customers; they’re people you haven’t been talking to, nor have you built a relationship with them yet – and that requires a far more substantial investment in marketing.
Consider the following:
• Your target customer avatar may change.
• Your key touchpoints may change.
• Your main brand messages may change.
• Your branding and designs may need to change.
• The channels you use and where you display your advertising may need to change.
Have you run the numbers on what these changes may cost you? In some cases these costs are worth it, and the ends justify the means. However, I raise them here as it’s a trap that small businesses often fall into – not planning (or budgeting) well enough for the selling of their new solutions when they are in the excitement of the R&D phase.
Finding the way forward
The challenge in New Zealand is that business owners often have a Kiwi “can-do” attitude.
We think we can just roll our sleeves up and make it work.
However, I would caution you against rushing into diversification. Think about your existing customers first and whether you can get more of those or somehow serve them better.
Penetrating a new market can be a worthwhile strategy, but it requires additional investment and a thorough assessment of channels, and all that comes along with that, for the new target customers.
Make a business case for both product diversification and market diversification as a means to grow, weighing up the associated additional costs in marketing so that you can make the most informed decision – one that’s most likely to succeed and least likely to include potential surprises!