“The economy is in a very unsettling, dicey situation,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “All forward-looking measures are pointing to significant slowing.” As a result, businesses face increased risk and volatility.  One way business leaders can mitigate risk, support growth, and protect their business during times of uncertainty is to consider a diversification strategy. In this article, we’ll discuss the importance of diversifying revenue streams, 4 ways to approach diversification, and 5 fundamental capabilities required for success.

Do You Want to Reduce Dependency and Spread the Risk?

Companies with a single product or service are at greater risk even when business is booming because they have limited diversification in their revenue streams. When there is a disruption in the market or a shift in customer behavior, these companies are more vulnerable to the impact because they don’t have other products or services to fall back on.

Kodak provides a sad but good example of a company that failed due to a single source of revenue. The company was once a dominant player in the photography industry, but its reliance on film photography made them vulnerable to the digital age. As digital cameras and smartphones became more prevalent, the demand for film cameras and film decreased significantly. Kodak struggled to adapt and lacked a diversification strategy. The company filed for bankruptcy in 2012, and its market value dropped from $30 billion in the 1990s to less than $1 billion.

There are more recent examples. During the COVID-19 pandemic many companies that relied solely on in-person services, such as restaurants or hotels, suffered significant financial losses due to shutdowns and restrictions. Restaurants that offered delivery and/or takeout continued operating while those who couldn’t adapt quickly failed. Business Employment Dynamics (BED) statistics indicate that more than 72,500 food and drink establishments closed, more than three times the quarterly average of about 20,300.

Companies with diversified revenue streams are better equipped to weather the storm because they have multiple sources of income that can balance out any losses in any one area. For example, Amazon’s diverse portfolio of products and services helped them thrive during the pandemic.  Their net sales increased by 38% in the first quarter of 2021 compared to the previous year.  Amazon is not a newcomer to leveraging a diversification strategy.  What started out as an online bookstore has become a company that is a force to reckon with in cloud computing, streaming media, and smart home devices. Amazon leverages market dynamics.  For example, investing more in their cloud computing division, Amazon Web Services, as more people began to work remotely and as more people turned to online shopping. This diversification has helped Amazon become one of the most valuable companies in the world.

Surviving unexpected events, whether that’s a pandemic or potentially a war in a region that comprises your primary customer base, a diversification strategy can reduce risk by spreading it across multiple sources of income.  Mitigating risk isn’t the only reason to diversify revenue streams. Another reason is to support growth. By expanding into new markets or developing new products or services, your business can tap into new sources of revenue and grow your customer base. This can help you stay ahead of the competition and remain relevant in a rapidly changing market.

Whether your diversification strategy is to offset risk or increase growth, diversifying revenue streams improves financial stability by reducing reliance on any one source of income.

Of course, diversification itself comes with challenges.  If it was easy, every company would do it and we wouldn’t need this blog post. Diversification can be costly, and time-consuming, and may require a company to invest in new infrastructure or hire new staff.  Additionally, diversification can lead to a lack of focus or cause an organization to spread itself too thin by pursuing too many revenue streams at once.

Despite these potential drawbacks, we believe the benefits of diversifying revenue streams far outweigh the risks.  Plus, it enables an organization to be more resilient regardless of the economic environment.

4 of the Best Ways to Diversify Revenue Streams

We agree with Bain and Company that until the uncertainty settles, it’s critical to prepare for a range of economic scenarios. They believe that “all the ingredients for continued interest rate hikes and uncertainty are present.”   There are many ways to diversify your revenue streams, some much easier than others.  Here are four to consider:

1. Expand into new markets: Examples include targeting new customer segments or entering new geographic regions. For example, a company that sells software to businesses in one region could expand its market by targeting businesses in another region.
2. Develop new products or services for existing customers: Examples include creating new offerings that appeal to existing customers or developing products or services that target new customer segments. For example, a company that sells accounting software could develop a new product for small businesses that do not currently use accounting software.
3. Offer new pricing models: Examples include introducing subscription-based pricing or offering a tiered pricing model. For example, a company that sells software could offer a subscription-based pricing model that allows customers to pay a monthly fee instead of a one-time fee.
4. Partner with other businesses: Examples include forming partnerships with companies that offer complementary products or services. For example, a company that sells coffee could form a partnership with a company that sells pastries.

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5 Skills to Achieve Your Successful Diversification Strategy

Diversification reflects how well an organization can adapt and innovate.  It might seem that you need to be a big company to diversify. But consider it may be the other way around.  For example, diversification is what enabled these companies to grow:

• Apple, which started as a computer company, expanded its technology capabilities and now generates significant revenue from its iPhone, iPad, and services divisions.
• Google, originally a search engine, now offers a range of products and services, including advertising, cloud computing, and mobile devices.
• The Coca-Cola Company expanded beyond its traditional soft drink business. Today, the company owns a range of beverage brands, including Dasani, Powerade, and Honest Tea. By investing in R&D and product development, the company has been able to create new products that appeal to a wider range of customers.
• FedEx has diversified its revenue streams by expanding beyond its core package delivery business. Today, the company offers a range of logistics services, including warehousing, freight forwarding, and supply chain management. By investing in people and processes, the company has been able to develop new services that meet the needs of its customers.
• Procter & Gamble diversified its revenue streams by expanding beyond its traditional consumer goods business. Today, the company owns a range of brands, including Gillette, Tide, and Crest. By investing in R&D and marketing, the company has been able to develop new products that appeal to a wider range of customers.

How these companies were able to successfully diversify provides some insights into what it takes for any organization to succeed at a diversification strategy.  Diversification requires a concerted effort and investment in a range of resources, especially these five fundamental capabilities:  data and analytics, technology, processes, people, and R&D. As we quickly examine each of these capabilities, give some thought as to how well your organization can deploy these.

1. Data and Analytics: Data and analytics play a critical role in diversifying revenue streams. By collecting and analyzing data, businesses can identify new opportunities, better understand customer needs, and gain insights into industry trends. This information can then be used to develop new products and services or to target new markets. For example, a company might use customer data to identify new market segments or to develop products that appeal to a wider range of customers. Once a new product or service is developed, data and analytics serve as the ingredients for gaining insights into how to position the new solution, create messaging that will resonate with prospective buyers, and identify preferred channels and touch-points in the customer buying journey.
2. Technology: Technology is another essential resource for diversifying revenue streams. By leveraging technology, businesses can create new products and services, streamline operations, and reach new customers. For example, a company might use social media platforms to market its products to a wider audience or to offer online services that cater to a global customer base. It is imperative to have a process and plan to successfully select and implement new technology.
3. Processes: Every business runs on processes. By developing efficient processes for product development, marketing, sales, and customer service, businesses can improve their overall performance and better meet the needs of their customers. For example, a company might streamline its supply chain processes to reduce costs and improve the speed of product delivery. It is important to understand how well your processes work and where there are opportunities to improve.
4. R&D: Research and development (R&D) is critical for diversifying revenue streams. R&D is the foundation for innovation.  By investing in R&D, businesses can develop new products and services that enable them to stay ahead of the competition and create more customer value.  How you bring a new product to market, launch it and create demand for it, will determine whether the investment pays off.
5. People: People are the most important resource when it comes to diversifying revenue streams. A diverse team of skilled employees can help businesses develop new products and services, enter new markets, and innovate. By hiring people with a range of backgrounds and skill sets, businesses can bring fresh perspectives and ideas to the table.

Investing in resources such as data, analytics, technology, processes, people, and R&D can help businesses succeed in diversifying their revenue streams. However, it’s important to note that diversification is not without risks and that success hinges on having the necessary resources and expertise.  Carefully evaluate new opportunities to validate customer adoption.

A Diversification Strategy is Not a Luxury: It is Vital to Your Survival

Companies with a single product or service are more vulnerable to disruption and risk during uncertain times. As businesses face increasingly complex and challenging markets, diversification will likely become even more critical to success. Diversifying revenue streams provides a viable strategy to achieve long-term success, higher revenue growth rates, and greater resilience in economic downturns. In today’s fast-paced and uncertain business world, diversification is no longer a luxury, but a necessity for survival and growth.

Have questions about your diversification initiatives?  We have expert answers.