Being in business is one, remaining in business is another. Startups who follow the one-dimensional approach to revenue generation may soon find themselves stuck halfway into the business. Of course, the revenue streams may remain stable in the first few years of the business, but in most cases, revenues from a particular line may just hit the rock bottom. To some extent, diversification may just be a way of relaunching and innovating.
How Big Is The Deal That Decades-Old Companies Are Choosing Diversification Strategy Instead?
Starbucks
Quite unexpected, Starbucks took to the media to announce it was no longer retaining coffee-making as its sole business driver, and for which it had been known for more than 43 years coffee. In addition to the coffee, the company had rolled out a chain of products from its brand-building strategy centered on portfolio diversification. The products featured juice, tea, baked goods, foods and more. One expert, Jason Moser, a senior analyst with Motley Fool One, a finance solutions advisory service, said the diversification was the best bargain Starbucks could ever get.
Moser said diversification is serving Starbucks well and has even brought the brand back to its former glory, undoing the financial troubles it faced less than a decade ago when Schultz stepped down from his position as CEO. At that time, the company’s strategy revolved heavily around growth at the unit level.
“There was a joke about Starbucks stores being opened in the bathrooms of Starbucks stores. It felt like at that point the growth story had played out,” Moser says. “What it took was getting Howard Schultz back on board to lead the way, focusing on trimming the fat of the operation, becoming more operationally sound, honing the supply chain, and diversifying the menu by offering more items.”
These positive financial trends span back across the past few years and coincide with the diversification strategy that allowed Starbucks to bounce back after the financial troubles it faced in the mid-to-late 2000s.
While diversification added extra pecks to Starbucks’ earnings, it furthered opened up the decades-old company for profitability.
Is Diversification for Startups Necessary?
Dj Vallauri is the Founder and CEO of Lodging Interactive, a New Jersey-based global digital marketing, and social media engagement agency, who ] first launched hospitality-focused digital marketing agency after spending nearly 25 years in the hotel sales and marketing business. The business became so successful that 90% of his revenue base came from one customer.
‘‘While it’s easier said than done, the idea “don’t put all your eggs in one basket” definitely holds true in business,’’ he said. ‘‘ It’s just too risky and too irresponsible for any entrepreneur to operate in this manner.’’
He narrated why he had taken the route of diversification.
‘‘Within just two weeks, I was fortunate enough to land a whale of a customer as my first client. This client was in growth mode and would take us with them every step of the way up. The business started small enough for us to handle and grew organically, as we also grew organically. Life was good then; this one customer generated nearly 90% of our revenue. But deep down, every time they gave us more business, I had a sinking feeling that the hole I was in was getting deeper with every new dollar this customer spent with us. The fear, of course, is that your one large customer files for bankruptcy and goes out — taking you out with them,’’ he said.
Ways Startups Can Diversify
New Products And Services Development
One way startups can diversify is by investing in product research and development. Doing so will open the possibilities of extra revenue generation for the startup.
‘‘Invest in research and development, and create new products and services that will present new revenue generation opportunities for your company. R&D is not just for large consumer brands; even small startups need to focus on this area. And no significant budgets are required; when you’re starting your business, you don’t have a lot of cash for R&D. Start by creating a SWOT analysis and a mind map to get you started in the thinking process,’’ Vallauri said.
Acquire New Customers
Acquiring new customers is the best way of steering away from a poorly performing business model. Asking questions on customer acquisitions for your startup is the best way of staying ahead of the game.
‘‘Be in constant sales mode. Increase all your sales efforts by 10 times,’’ Vallauri said. ‘‘Look at your fixed costs, such as your personnel. Can your company take on more business without having to hire new people? If the answer is yes, you’re halfway through your diversification efforts. You are already paying your team members to handle your current customer base, which is what I call the “sunk costs” of doing business. So if you can add more customers without having to add more people, this means you can aggressively price your services to win the business, thus giving you an edge towards your diversification process.’’
Vallauri said the more you can diversify your agency business, the better you would sleep.
‘‘My agency now has two operational divisions to ensure our business and revenue diversification. One division is dedicated to traditional digital marketing agency services and the other is dedicated to more emerging marketing practices related to reputation management and social media marketing. Should any one area of the business become commoditized, we have the ability to leverage our other service offerings. Today, my digital agency is fully diversified and can weather any storm. And as a result, I’m sleeping very well,’’ he said.
SEE ALSO: These Are Eighteen Mistakes That Kill Startups
One More Point About Diversification:
Center diversification around your core business.
‘‘Never forget to preserve the core while stimulating evolutionary progress. Keep in mind that evolution involves both variation and selection….selection involves two set of key questions,’’ writes Jim Collins, author of Built To Last. ‘‘The first is simply pragmatic: does it work? But as important is the second question: Does it fit with our core ideology? The variation… must be useful new, useful and reliable…in order to stand a good chance of being selected.’’
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.