A great way to attract new customers, and get loyal customers to return, is by introducing new products and services. This is known as diversification.

In this article, we’ll discuss what diversification in business is and look at ways to diversify your own business. The topics we’ll cover include:

  • What is diversification in business?
  • Why is diversification in business important?
  • What can I do to diversify my business?
  • How can I manage revenue from diversification with Countingup?

What is diversification in business?

Diversification is when you expand your business by developing a new product or branching out into a new market. 

This is very common in large corporations but less common in smaller businesses because you need to have a fair sum of money to diversify. You need money for product development, market research, and advertising the new product. It’s also a good idea to keep some cash in reserve if the diversification goes badly and your new goods sell poorly.

That said, many business owners use diversification as a last resort if their business is struggling. Instead of investing their remaining money into the current product, they’ll divert funds to a new product. This can be an excellent way to kick-start a failing business, but it’s also very risky.

As with any big business decision, it’s vital that you have a plan in place if you decide to diversify. You need to plan how you’ll advertise your new product or service, how you’ll provide or manufacture it, how much it’ll cost, and what you’ll do if it isn’t successful. Without a detailed diversification plan, it’s unlikely your efforts will be as effective as they could be. 

Why is diversification in business important?

Minimise risk 

While there are benefits to taking risks as an entrepreneur, it’s best to minimise any unnecessary risk within your business model. Diversification minimises risk by allowing your business to invest in multiple opportunities instead of relying on one product or market to provide revenue. 

While many businesses thrive on selling one great item, relying on a single product can mean cause problems if that product loses its popularity and begins selling poorly. Diversification eliminates that risk: put simply, it means that a business is not putting all its eggs in one basket.

Encourages growth

Diversification is a key part of many small business growth plans. By diversifying into a new market, you open your business to much more than just new customers. New markets also mean new opportunities and contacts, which are crucial if you want your business to grow and develop. 

Target other markets

Your target market is the group of people you think is likely to buy your products, so most of your marketing and product development will be aimed at attracting this group. As your business grows larger, though, the sales revenue from your original target market may not be enough to continue normal operations.

This means you’ll need to expand your target market to include more customers, and the best way to do this is through diversification. By diversifying the goods and services you offer, you can either expand your current target market or target an entirely new group of potential customers. 

What can I do to diversify my business?

There are four commonly accepted types of diversification. We’ll list them below, so you can decide which is best for your business.

Horizontal diversification

This is when you offer a new product or service that’s significantly different from your original product line and still appeals to your previous target market. This might require you to learn additional skills or buy new equipment to make the new product. For example, if you have a jewellery business, horizontal diversification might mean selling clothing as well as jewellery.

Vertical diversification

Vertical diversification is when you move backwards or forwards along a supply chain. If you have a lot of cash in your business and are unhappy with your current suppliers, this can be a great option. It means you can cut out your existing suppliers without suffering from a supply shortage or inventory problems, as you’ll become your own supplier.

A more specific example would be if you run a makeup business that focuses on production and only acts as a supplier to retail stores. Vertical diversification would mean opening a retail store to sell your product directly to customers.

Concentric diversification

Concentric diversification means that you start selling products that are very similar to your existing ones but are different enough to interest new customers. 

Concentric diversification is good for when you’d like to diversify, but don’t want to scare off existing customers. An example of this would be a desktop PC manufacturer that begins selling laptops.

Conglomerate diversification

This type is the opposite of concentric diversification. Instead of developing a product similar to your existing product, you begin selling something entirely unrelated. 

This is very risky, as you will be trying to sell to an entirely new market, and you cannot guarantee that your old target market will be interested in the new product. An example of this would be a skateboard supply store that starts selling clothing.