Market fluctuations, digital disruptions, and constantly changing trends are just a few of the challenges that ecommerce store owners have to face. Staying profitable (and cutting-edge, or at least relevant) can always be tough for any business, whether you’re just starting your entrepreneurial journey or have a company that’s been in business for years.
Companies that have been in business for a while also have the added risk of reaching a business plateau. You might be making sales, but you’re not growing at the rate you want. Your target market could be saturated, with new competitors cropping up every day, making it hard for you to stand out.
Or, maybe your main product is seeing a drop in demand due to factors beyond your control. As you look into new ways to grow your business fast, one question you might be asking is, “Is it time to diversify?”
Diversification is a growth strategy used by companies to enter new markets or to increase their market share. It can be done by selling new products, either by launching new ones or acquiring licensing rights to other products. Business diversification can also mean entering a completely new industry.
Since innovation and market disruption are involved, the stakes are high. After all, you don’t want to take too much time or money away from your current business offerings, or your tried and true money-makers. However, diversification can be rewarding if done the right way, at the right time, and under the right conditions.
How do you know if and when your business should diversify, and what are the benefits and risks? What are the ways to diversify? Read on to find out more about this powerful growth strategy and see if it’s a move you should make for your business.
The Benefits of Business Diversification
When talking about business diversification, you’re bound to hear a mix of success and horror stories.
There are companies like Amazon, who successfully diversified from selling books to becoming a platform selling basically everything that people could ever want or need. There are those whose diversification attempts ended up in bankruptcy, like in the case of Fab, the unicorn ecommerce startup that expanded and diversified too fast without planning carefully. The key takeaway from all this? Before you decide to diversify, make sure you do your homework.
Start by knowing why you want to do it, understand the risks, and take a look at your numbers. Here are some of the reasons why businesses decide to diversify:
- To Grow Revenue: Diversification is a great growth strategy to bring in more sales. Extra profit is drawn from a new product or new markets.
- To Defend Against Competition: In a certain industry, there might be locations or customer groups who aren’t being served. These under-served spaces mean extra revenue and if you don’t quickly fill in the need, a competitor will. Being the first to serve can grow your customer base and loyalty.
- To Reduce Risk: The concept of diversification in business is the same as in financial investing, don’t put all your eggs in one basket. Focusing all your efforts on a single product or industry can subject you to the volatility of customer demands and market changes.
- To Survive a Decline in the Core Business: Market changes are inevitable and over time demand for certain products declines. Once a product or business reaches a state of maturity where it doesn’t grow anymore, diversifying into other products and categories can be one way to save the overall business.
- To Seek Synergies: When diversifying, companies can identify distinct competencies and strengths in their business and use these to create value.
- Gain Market Power: Another reason for diversification is that a company can gain increased market share.
The Risks of Business Diversification
Diversifying your business can help you scale and find new ways to earn profit. It can also be risky, and there are challenges and drawbacks to think about. These include risks such as:
- It Could Lead to Higher Operating Costs – When you diversify, you need extra fuel put into the business. That could be extra capital, space, or manpower. You can spread yourself too thin if you don’t have enough resources to meet your new goals and numbers. Think about the effects diversification would have on your budget and team and see if it would still be worth it.
- It May Divert Attention from Your Core Business – A new business demands time and energy for it to succeed. If your current business is thriving and you want to diversify for other reasons, be sure to manage time and resources efficiently. Selling new products could take away efforts from your core business and existing products.
- You May Have a Lack of Expertise – Sometimes, a company enters a new industry without having the right skills or expertise for it. To make up for this, you might need to hire new employees, outsource, or invest in training current employees. Being a new player in a certain field could also lead you to respond slower to market changes and disruptions if there are no experts on the team who know how to handle these challenges.
- It Could Result in a Change in Brand Perception – Entrepreneurs know that a successful brand and a loyal customer base takes time to build. You might have enough resources and expertise to diversify, but there’s a risk of diluting your brand image if you start to offer a whole new range of products, especially if they’re unrelated to your current business. If you’ve established yourself as a specialist in one field, introducing other offerings might also bring doubt as to your expertise.
When to Consider Diversifying
After understanding the benefits and risks, take a look at your finances and study the market you want to enter into. Author and economist Michael Porter recommends using these three tests to know whether or not diversification is suitable for your business:
(Source: Mind Models)
Attractiveness Test – How attractive is the industry or market that you plan to go into? How likely are you to generate profit?
Cost of Entry Test – How much is it going to cost? Are the initial investments going to cost you more than your potential profits?
Better Off Test – Will the company and new business unit be able to achieve synergy from sharing resources and strengths among different businesses?
A successful diversification strategy involves using the business’ existing skills and strengths to launch new products. There are different types of diversification models, each one having their own characteristics and advantages. Let’s take a look at those now:
This means adding new but related products or services to the current business. The great thing about this type of diversification as it uses the company’s know-how in selling similar products.
Concentric diversification can help you gain a strong market position against competitors. An example of this is ecommerce retail giant Zappos. Zappos started as an online shoe store, and after eight years started selling clothing as well. It was a great fit, and one that made sense. The retailer was able to leverage their experience selling a similar product.
Vertical diversification or vertical integration is when a company expands its operations across its own supply chain. Processes that were previously outsourced will be done in-house. This integration can be backward (involving steps in manufacturing or development) or forward (order fulfillment and distribution).
An advantage of pursuing vertical integration is that you have greater control over your supply chain. Netflix is an example of a business that did a backward integration. They went from being solely an online platform for watching TV shows and movies, to later on developing and producing their own shows.
One thing to consider about vertical diversification is that it can be costly and require new talent in operations outside the scope of the businesses’ current abilities. One of Netflix’s biggest investments in diversifying backwards is purchasing this production studio in Albuquerque, NM which they project will bring them in a billion in revenue:
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This is when a company starts selling new products, which may be related or unrelated, to their existing customers. An advantage of this type of horizontal diversification is that you already have knowledge of your current market. You know their needs, wants, and the language they speak. With enough data, you’re able to successfully market new products to them.
Sunnies Studios is an example of an ecommerce company that understands and listens to their target market. They successfully diversified their business with different products. The Sunnies brand originally sold only sunglasses, expanding into prescription eyewear, then makeup, and the latest addition to the brand is a cafe.
(Source: Emilia Metry)
Conglomerate Diversification is when a company sells new products or services that are unrelated to its existing business. It may not make use of operational synergies, but it can use strategic synergies (management techniques, core values) in its operations.
Conglomerate diversification is the riskiest type of diversification, but the rewards are high if done well. The Virgin Group is an example of a company with diverse business interests, having a presence in industries that are unrelated- music, travel, finance, and telecommunications. Here’s a look at all of Virgin’s businesses:
(Source: Virgin Group)
Ecommerce Diversification Strategies
For ecommerce retailers, here are two diversification strategies that you can use to strengthen and grow your business:
Markets change and brands that sell only one product or target one specific industry could be at risk if demand falls. For example, the travel industry has been down in the past year and demand for things like luggage or travel accessories plummeted, impacting brands that sell in this category. Companies had to quickly pivot and diversify with new products to bring in sales.
Luxury luggage maker Rimowa came out with cool-looking iPhone cases which use their iconic hardshell design, and ecommerce travel accessories brand Paravel launched an easy-to-clean belt bag marketed to carry essential things like masks and hand sanitizers. It sold out immediately and had to be restocked several times. Diversification by selling other products cushions risk and gives you another source of revenue.
Using more than one online selling channel is a great way to diversify and sell your products. There are many online marketplaces to sell on, each of them having different target audiences. You can reach more customers this way and discover potential new markets.
Selling on more than one platform also protects you against the risks associated when a marketplace’s rules and algorithms change. You might have also heard of horror stories of online sellers getting their ecommerce accounts suspended.
If you didn’t do anything wrong, you’d be able to get access back but you still have to follow a process which could take time. This is extremely stressful for an entrepreneur as you lose precious time and money waiting to get things sorted out.
Before considering platform diversification, try to ask the following questions:
- Will you need new software to manage all sales channels in one dashboard?
- Can your supply chain and fulfillment operations handle a multi-channel selling strategy?
- If you have a third-party logistics provider, which platforms do they support?
- Are big changes needed to handle order fulfillment if you add sales channels?
- Can you manage the order fulfillment expectations of each platform?
- What will be the costs for selling on each platform, and how will multichannel selling affect your profit margin?
There are many different ways to grow your business. I’ve also talked about other strategies like acquisitions and merging multiple businesses. Remember that like any growth strategy, diversification requires careful preparation and planning. Each ecommerce business also has its own unique strengths and capabilities. There’s differences in terms of industry, maturity, and size.
A diversification strategy that works for one may not be the right one for you. Understand the risks involved for your business before investing your time and money. With careful research and by keeping your eyes open, you’re sure to find a diversification strategy that works for you, one that’ll help your business to grow and become even more profitable.
The Next Step
If you’re thinking about diversification, then your next step should be to find out whether or not your business could benefit from this strategy.
Option One: To start, take a look at your current customer base. Consider whether you could sell them something different. The advantage of selling your existing customers something is that you already have an audience who’s interested in what you have to offer. It can be a good place to start.
Option Two: If this isn’t the best option for you, consider whether you could expand your customer base by selling a different product or an existing product that’s packaged differently. Be sure to consider whether your products will compete with one another if you’re selling similar products, the last thing you’d want is to eat into your own market share!
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