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6 essential advantages of business diversification

6 essential advantages of business diversification

This article is a submission by D&V Philippines. D&V Philippines has years of experience in the accounting and finance industry. This third-party services company can provide you with the back-office support you need. 

Uncertainty is a risk many businesses may encounter regardless of size. You can find many stories about companies facing financial problems or having closed years in their niche. 

One of the reasons this happens is because they failed to diversify. They invested most, if not all their resources in one technology, service, or product. 

They didn’t see their niche’s changing tastes, needs, and trends in their niche. If they did see these, they didn’t act on it. 

This is when businesses should consider diversification. The latter is a strategy that comes with many advantages, regardless of the size of a company. 

It allows you to reduce risks, gain different sources of income, and reduce costs.

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6 benefits of business diversification

These are some of the benefits of business diversification that can convince you to adopt this strategy.

1. Boost sales and profit

Your company may be generating a sizable profit from one product or service. However, this might be an unsustainable strategy because of factors such as:

  • Changes in consumer needs and wants
  • Inflation
  • Trends in your industry

Your company might lose its main source of income and struggle to find a new one. 

Business diversification provides you with opportunities to gain new sources of income. A diversified revenue stream allows you to sustain growth and profit from month to month. 

Your profits have a positive effect on your cash flow. You’ll have more resources you can utilize to improve your products and services, invest in the skills of your employees, or identify new markets your business can enter.

6 benefits of business diversification
6 benefits of business diversification

2. Broaden customer base

One of the benefits of business diversification is that it enables you to enter a new market and gain new customers. 

Your business will stagnate if you don’t get new customers. The simplest way to diversify and attract potential customers is to add more products and services to your portfolio. These don’t have to be completely different from your current offerings. 

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Provide complementary products or services to your existing ones. Train your sales team to upsell a bundle of complementary items.

This enables your company to move more products to a wider audience or increase the spending of your current customers whenever they shop.

You can also innovate and launch new products to draw more customers. Base your innovation projects on data and insights you get from your current customer base

Learn more about them, identify features or products they might want to have, determine their current satisfaction with your brand, and other details. This allows you to create a product and plan its launch effectively.

3. Cut overall costs

Business diversification allows your company to reduce costs.

Adding similar products to your portfolio allows you to reach a new customer base, retain your current customers, and/or upsell a package of complementary items. 

Related products go through similar production processes, meaning they are often mass-produced. If different features exist among these items, they don’t diverge enough to change the entire process. 

You can purchase more related products at wholesale prices when you buy in bulk while reducing costs. This allows you to save more money and boost profit. 

Your business will have more resources for growth and/or sales, marketing, and branding campaigns. 

If you produce your own products, a similar concept applies. You can use the same manufacturing machines to make related items if they share core features and processes. 

You can cut or maintain production costs without sacrificing the quality of the items you sell.

4. Reduce risks

Threats to the survival of your business can occur unexpectedly. Some risks your company might face include pandemics (COVID comes to mind), recessions, natural disasters, and shifts in market trends. 

This can lead to lean months or worse. Business diversification allows you to manage financial risks your business might experience. 

Diversify your supply chain, so you have multiple sources for materials and goods. Identify diverse ways of financing your business, such as mixing short and long-term loans to meet the needs of your company.

5. Diversity in business partnerships

Diversification isn’t just about more products or services or new markets. You can also diversify your business partnerships. 

Look for different suppliers when you purchase goods or materials. This allows you to reduce the risk of supply chain disruptions. 

Partner with outsourcing firms that can do specific tasks your team lacks experience or skills in. Outsource tasks related to bookkeeping and accounting. Experienced accountants can:

  • Create and manage your financial reports
  • Update your books
  • Process payroll
  • Process accounts receivable and payable

You’ll need updated financial information when you decide to diversify your business. 

You’ll use your company’s financial data to determine if diversifying your products or services, entering a new market, or investing is feasible. 

6. More growth opportunities

One of the benefits of business diversification is that it provides your company with multiple growth opportunities. Staying on the same road leads to stagnation and a loss of your competitive edge. 

Take calculated risks when you diversify. Use data to study a new market or an investment for an expansion project. 

A data-driven strategy reduces your margin of error and boosts your success rate. A new market provides you with possible new customers. New partnerships provide you with a wider network of suppliers and distribution channels.

Different ways to diversify

You can achieve business diversification through different ways, namely:

Vertical diversification 

This approach diversifies your business across the supply chain. One way to implement this strategy is by creating your own distribution channel.

Horizontal diversification 

Horizontal diversification involves developing new services or products catering to a similar audience you already have. You can offer complementary items to retain current customers and attract new ones.

Different ways to diversify

Concentric diversification 

This strategy is similar to the horizontal diversification approach. The difference is that it expands a business’ portfolio to include related services or items aligned with its core offerings. 

An example would be adding new flavors to a current line of chocolate bars. 

Now that you’re familiar with the benefits of business diversification, determine which strategy works best for your company. Implement an approach that’s profitable and feasible for your business.

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