2017-03-29 00:00:00 Running a Business English Understand the concept of diversification and why diversifying offerings can strengthen your small business. https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Farmer-Checks-How-Much-His-Revenue-Has-Increased-Since-Diversifying-The-Products-He-Makes-Available-To-His-Customers.jpg https://quickbooks.intuit.com/ca/resources/business/understanding-diversification-as-it-applies-to-small-firm/ Understanding Diversification as it Applies to Your Small Business

Why Small Business Diversification is Important

4 min read

When you first start your small business, you’ll likely focus on a particular customer niche with a small range of products or services. It’s easier for businesses to start small and then grow, but waiting too long to diversify your business offerings can actually slow your growth. Diversifying your small business helps you mitigate risk and continue controlled growth.

What Is Diversification?

Diversification is all about creating new products and services and exploring new markets and customers. Expanding in this manner can mean taking on more business development risks in the short term, but the goal is to make your company safer in the long run.

Benefits of Diversification

While diversification isn’t completely necessary for a business to survive or thrive, it may help reduce overall business risk. When you rely on a single product, service, or customer for your income, you assume a lot of risk because that source could gradually decrease or suddenly dry up. Your biggest client might leave without warning, or your trendy product may suddenly lose popularity. Maybe a competitor swoops in and steals a large share of your business. By diversifying, you spread out the risk across multiple products, services, or customers so you can more easily weather decreases in one of those areas.

Risks of Diversification

On the flip side, you should keep in mind that attempting to diversify your business too far afield, in completely unrelated markets, can actually increase your risk. This can happen because you don’t have expertise in the newly entered market or your target audience has no interest in the new business line. Diversification may not work if you rush into new products or services without doing research first. Using SWOT analysis or other analysis methods to assess your own capabilities and market opportunities can help you decide which type of diversification is best.

Diversifying Clients

One way to diversify is by adding to your client base. If you run a service-based business, you might launch your business with just a few clients providing all of your revenue. It’s easy to feel secure in that income, but a client might go out of business, decide they no longer need your services, or switch to a different service provider, leaving you with a drastic drop in revenue. By intentionally finding new clients consistently, you give yourself more stability by spreading out the revenue. If one client leaves, you still have several others to continue bringing in money.

You may also choose to broaden your target audience to increase your customer base. You don’t want to make too much of a stretch, because trying to serve everyone can spread your business too thin. But you may find a similar demographic that naturally fits with your services that you haven’t thought of targeting previously. For example, if you target stay-at-home moms for your fitness classes, you might broadening your audience to working moms by scheduling additional classes early in the morning, during the lunch hour, and after work.

Diversifying Products and Services

Some businesses diversify by creating new products or services. Say you own a company that sells computer hardware and you have one specific hot-selling product that generates lots of revenue. If you want to diversify this business, you might add other products such as software and and services such as repair and technical support. You diversify by going from one product line to two products and two services, all under the same business umbrella. This means if sales of one product lag during a particular period, the other three offerings can help offset the poor performance of the first product. Sales and profits from each product tend to fluctuate over time, but overall business sales and profits may become more stable if you have a variety of things to offer.

Diversifying also gives you an easy way to cross-promote products and services. You might create bundles with computer hardware and software to encourage customers to buy more. Or you might offer a special tech support package customers can purchase when they buy a computer from you. This diversification can help increase each sale, and it makes you a more comprehensive resource in your niche, so customers can get all the help they need in one spot.

Diversifying Your Sales Methods

Sometimes switching up how you sell your products or services can help with your diversification. Let’s say you run a brick and mortar retail shop. Expanding your operation to online retail exposes you to a much wider audience with a greater potential for sales. Instead of limiting yourself to local shoppers, you can market to people across the country. Or maybe you have an online store where you sell handmade bath and beauty products you make at home. Instead of just selling one product at a time, you might start a monthly subscription service to encourage regular monthly purchases. You might also partner with local boutiques who are willing to sell your products in their stores, so you can reach local shoppers without your own store location.

Looking at your current business model and finding ways to diversify how you do business can help your company grow and spread out the financial risk. With tools such as QuickBooks Online, you can track your progress and monitor your finances easily. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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