“Troy, I need to diversify.” It’s one of the most common comments I hear from a client, or even just someone that I’m chatting with. Everyone is looking to grow their business, and one of the most common ways to do it is to think about adding new products, new services, and new markets. I’m not immune, either. I am constantly thinking of new ways to offer value to you (or to other customers).
The trouble is that the road to diversification is paved with potholes – which, I suppose, means that it’s paved by whoever does the street my office is on in Kansas City. Diversification sounds great – limited sales effort, incremental investment, and a big win in revenue. Many times, however, it doesn’t work out that way, and if you want to diversify the right way, there are some things you need to be aware of.
When you start thinking about diversifying, there are a few key questions that you need to ask yourself:
- Can the new product be sold through your existing relationships? This might be the most important factor in diversifying. Typically, the idea behind diversifying is horizontal integration; the idea that you can sell more products and/or services to existing customers (thus a lower cost of sales). That can work – IF you are selling into your current contacts. On the other hand, if you have to forge new contacts, that lower cost of sales can quickly go away.
One example that I’ve seen in several cases is companies that sell office supplies and decide to diversify into promotional products. It sounds appealing. Both are incremental sales with a strong recurring revenue potential. The problem was that the sales processes go through two different departments. Office supplies are typically sold to a CFO or Office Manager; promotional products are usually sold through the marketing department – and all their current contacts could provide was an introduction. Some were able to succeed. Most weren’t.
- What new infrastructure do you need to be able to service the customers? Any time you bring in new products, you need a new infrastructure or part of one. The biggest question is – what level of infrastructure do you need? Some companies – Grainger comes to mind – simply build a business model around moving boxes from one place to another, and what’s in the boxes isn’t overly critical (according to a quote from the president of Grainger that I read years ago). In that environment, the incremental cost of new products is very low.
For most of us, that isn’t the case. Your company is probably set up with one specific service and delivery model, and the critical question is to understand what modifications will be needed (new personnel, space, processes, equipment) to service the new product. This seems obvious, but you should figure out ahead of time what it’s going to take. More importantly, figure out what pace you can use to add the new resources. You probably don’t need to add everything at first; you can sell ahead of the infrastructure to a certain degree.
- How does the new product fit with your current sales and service culture? Some sales environments require more hand-holding than others. The key to understand is – how much hand-holding and service is required for the new products? This is one of those issues that seems to have an easy solution but doesn’t. If you have a high service model, your customers are going to expect that model even if you add a low service product. On the other hand, if you have a low service model, your new product had better be a low service product – or you won’t be able to meet customer expectations.
- What’s the competitive landscape? Again, this seems to be obvious – but based on what I’ve seen in the world, it’s not. If you’re diversifying, are you moving into a stronger or weaker competitive landscape? Sometimes companies have a knack for jumping out of a frying pan into the fire, and walking into a tougher competitive situation.
- How good is your sales force? I’m putting this last on the list, but it should be one of the first considerations. Sometimes the urge to horizontally integrate is driven by a low performing sales force; the idea is that if the current sales force isn’t good at getting new customers, maybe they can at least sell more stuff to current customers.
The trouble with this idea is that a sales force that isn’t good at getting new customers usually isn’t that good at executing in other phases of the sales game, as well – so the result is that you free the sales force from trying to get new accounts in favor of focusing on more sales to current customers, and you get neither. Horizontal integration isn’t a solution or a sidestep for a weak sales force.
Diversifying can be a great way to build your business, but you have to have your act together first; it’s not an answer for nonperformance in other parts of your business.
