Diversifying revenue streams is one of the most effective ways to both grow a small business and ensure its long-term success. By diversifying products, services and/or markets, businesses can reduce reliance on a single or small number of revenue sources, giving the business a more stable revenue base.
In this post, we’ll look at what diversification is and the benefits it can bring.
Entrepreneur.com’s business encyclopedia defines diversification as: “A risk-reduction strategy that involves adding product, services, location, customers and markets to your company’s portfolio.”
In other words, it’s adding to your business in some way – it might be making new products or finding new customers, or both – to spread risk. The aim is to make the company less vulnerable to the sort of outside threats you might identify in a SWOT analysis, by being less reliant on income from only one source.
There are a lot of ways that small businesses can expand their revenue streams. The most common way to diversify is to come up with new products or services that match the ones already on offer. For example, a bakery might add cakes, muffins, bagels, or other baked goods to its list of products, to sell alongside its bread. It may even diversify into related products like bread-knives and cutting boards, cheese, and butter.
Diversification doesn’t have to be about the product or service on offer. Businesses can diversify geographically by opening up new locations; they can pair up with other businesses to reach new markets, or even enter whole new industries.
By diversifying their revenue streams, small businesses can increase their profitability, stabilize their income, and achieve sustainable long-term growth. Let’s take a closer look at some of the key benefits diversifying can bring.
One of the most important benefits diversifying brings is increased robustness for the business. Relying on one or a few closely related products leaves businesses vulnerable to changing market conditions. Think of all those VHS and DVD rental stores that disappeared from our high streets when streaming services came online. Adding in new revenue streams makes it more likely that the business will still receive revenue, even if one or more of its products fails.
Not only does diversifying make a business more stable, it also allows the business to adapt faster to rapidly changing conditions. Having differentiated revenue streams already on offer means that if conditions do change quickly – as they did for many people during Covid, for example – the business doesn’t have to spend time and money getting a new product or service up and running in place of the original one. Rather, staff can simply pivot to marketing an alternative product within the inventory as the primary product.
Expanding the number of products or services on offer allows small businesses to appeal to more potential customers. It can also help the business move into new markets they may not have otherwise reached. For example, a sandwich shop that caters to the lunchtime crowd might want to add salads to its menu, to appeal to more health-conscious customers. That way, two groups of customers are now attracted: those who want sandwiches and those who want salads. Adding in baked potatoes would widen the customer base still further. In this way, the company can broaden its appeal and grow its revenue.
Diversifying can help small businesses differentiate themselves from their competitors, giving them a competitive advantage over neighboring businesses in the same industry. For example, a gym that also offers weight loss tips and meal plans might be more appealing to a health-conscious customer base than one that doesn’t offer these extra services. That competitive advantage quickly turns into increased revenue as customers flock to the business for the extra services on offer.
A surprising benefit of diversifying is that it can lead to more innovation and creativity within the business, as it forces the owner and employees to think outside the box about their current products. Considering what new products and services to bring online often shows existing products in a new light. The result is often a moment of inspiration, which can be rocket fuel for a company.
By continually asking how the business might diversify next, it’s possible to foster a company culture of innovation and creativity, which in turn leads to new products, new customers, and more satisfied customers. All in all, a recipe for long-term success.
It is possible to have too much of a good thing. Diversifying too rapidly, or without keeping sight of the overall vision for the business, can distract employees from the core purpose of the business. That can lead to customers becoming confused about what the business does, which will hurt, rather than help the business overall.
It’s a good idea to carry out a SWOT analysis before diversifying to make sure that the new products are in line with the company’s short, medium and long term goals. However, if managed properly, diversifying your revenue streams by adding new products, services, customers, and markets to your business’s offering can bring great rewards.
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