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Mistake #27

Not Diversifying

When money is coming in, and things are going well, it’s easy to become complacent. You’re reluctant to try new things. In most cases, these good times don’t last, and your left scrambling to find new revenue streams.

In the book Diversification Reconsidered by Peter Frumkin and Elizabeth K. Keating, the authors say, “By establishing and maintaining multiple streams of funding…organizations can avoid excessive dependence on any single revenue source, stabilize their financial positions, and thereby reduce the risk of financial crises.” In short, the only way to safeguard against a financial crisis is by generating new sales.

Product life cycles and more demanding customers require small business owners to change very quickly. You can minimize the disruption to your business by diversifying your clients, products, channels of distribution, and geography.

Types of Diversification

There are four ways you can diversify your small business:

1 Client diversification. It’s not unusual for a small business to have 50 percent or more of its revenue with one client. Take it from me, anything can happen, and your mega-client can disappear at a moment’s notice.

2 Product diversification. Diversify by adding a new product or service that appeals to your existing customers. Or you can jump into a new market segment with an entirely new offering.

3 Channel diversification. Not varying your marketing channels and campaigns can be as harmful as not doing enough marketing. I recommend that you focus on two to three channels until you have those mastered.

4 Geographic diversification. If you’re a local business, you can diversify by opening a second location. However, if you’re exclusively online, you can expand by opening a physical location.

Strategies for Diversification

On several occasions, I had potential suitors looking to buy a couple of my businesses. Client concentration was at the top of their list of concerns. Here’s how I tried to offset their worries:

 Keep marketing and selling. You have to bring in new revenue to counter-balance your significant clients. Be in constant sales mode. Try to increase your sales efforts by ten times.

 Prune your bottom-tier clients. Pruning doesn’t help diversification initially, but it should free up enough of your time so you can go out and get new customers that will. There’s a great book on this topic, 14The Pumpkin Plan by Mike Michalowicz.

 Adapt your product or service. Tweak your product or service, so it appeals to a new group of customers. For example, if you have a high-end product, consider a less-expensive version. You can also look for related products that go along with what you sell.

 Create new products and services. Invest in some low-cost research and brainstorm ideas that appeal to a new customer segment. If you sell products, look for add-on services (e.g., warranties, training, etc.). And vice-versa, if you sell services, look for ways that you can “productize” your offerings.