How to Diversify Your Customer Base

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Different colors of hands - Customer Diversification Strategies
Kevin Marshall
Kevin Marshall
October 10, 2020
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UPDATED:
October 14, 2020

Today's small businesses need a big bag of tricks to compete. Learning how to diversify your customer base is one of those things that will help you grow your business. The following customer diversification strategies will work for all types of companies. Whether you sell products or services, one of these strategies is sure to work for your company.

Reasons to Diversify

There are a couple of reasons that businesses choose to diversify. These include:

• Reignite growth

• Survive

Understanding the Ansoff Matrix

The Ansoff Matrix Chart

Mathematician Igor Ansoff developed the Ansoff Matrix in 1957. In it, he hypothesized that there are four different growth strategies aligned by markets and products.

To grow existing products in current markets, you employ market penetration strategies. To develop existing products in new markets, you employ market development strategies. To produce new products in current markets, you use product development strategies. And finally, to develop new products in new markets, you employ diversification strategies. It is in this quadrant of the Ansoff Matrix that this discussion will reside.

Types of Customer Diversification Strategies

There are four types of diversification strategies. These are horizontal diversification, vertical diversification, concentric diversification, and conglomerate diversification.

Horizontal Diversification

Horizontal diversification occurs when a company decides upon launching a new product that is unrelated to its existing product lines but fills a need for some current customers.

Horizontal diversification is the diversification strategy with the least risk because it involves working with existing customers and market segments while expanding the customer base. An example of this would be a cellphone manufacturer who decides to begin making cellphone accessories such as cases.

Diversification - Different colors of puzzle pieces connected

Vertical Diversification (Both Forward and Backward)

Vertical integration, also known as vertical diversification, happens when a company moves up or down its supply chain and combines two or more production stages usually provided by more than one company. Many companies do this by taking over all of the functions for manufacturing and distributing the products. For example, they might bring shipping in-house, whereas before, they used a trucking company.

There are two types of vertical diversification; forward diversification and backward diversification.

In forward diversification, if your company is generally at the beginning of a manufacturing process or supply chain, you might decide to begin controlling more of the supply chain. An example of this might be a farmer who decides that they want to grow tomatoes and make tomato sauce now as well.

Backward diversification occurs if you are near the end of a supply chain and now want to move back down the chain to control more of the process. In this case, if a tomato sauce manufacturer decides they want to produce the tomatoes, this is backward diversification.

Concentric Diversification

Diversification - Arrows going up, down, left and right

When a company enters a new market with a technologically similar new product similar to their existing products, concentric diversification, the technological similarity allows them to leverage some competitive advantages through technical knowledge, industry experience, and possibly even manufacturing capabilities.

This diversification strategy is useful when revenues from one product are declining, and those losses can be offset by the sales and marketing of a technologically similar product. An example of concentric diversification would be a speaker manufacturer who decided to begin manufacturing radios that utilize their speakers as an integral part.

Conglomerate Diversification

Conglomerate diversification is a corporate strategy that involves not only entering new markets and customer bases but entering them with products completely unrelated to your current portfolio. In this case, the word conglomerate indicates a single corporate group that operates multiple business entities in totally different industries. One parent company owns all the other businesses in the conglomerate and consolidates the control of financial resources.

An example of a conglomerate diversification strategy would be a vertical integration strategy that swallowed the entire supply chain from growing tomatoes and many other crops to manufacturing food products like tomato sauce from their new crops, to a restaurant supply company, and finally, a chain of restaurants. That is going far beyond a simple vertical integration, and the parent company would create smaller business entities for each step of the supply chain.

Calendar drawing on a chalkboard

When Is the Right Time to Diversify?

A company should assess its strengths in its current position. What do you do better than any of your competitors? How can you apply that expertise to a different market share? What problems or opportunities will diversification solve or provide? What processes can you tweak to develop an entirely new product or service without the outlay of tremendous amounts of financial resources?

Additional Diversification Tactics

  1. Reorganize your company's structure to create new groups focused on new markets or new products.
  2. Create an inside sales group that brings your customers inside the company through webinars, social media, and video conferencing. Gone are the days when sending sales teams out to call on customers is the most cost-effective method of getting the word out.
  3. Create a business development team whose sole mission is to explore diversification options and develop a plan to implement a diversification strategy.

Diversification Tools

One example of a diversification tool is a customer loyalty program. We can provide you with the best customer loyalty program software designed to engage your customers and deliver the news and incentives to take advantage of any new product or service offerings you may have.

Diversification Strategy Risks

Risk of Diversification

Diversification strategy is often considered a high-risk growth strategy for two fundamental reasons. The first is the business's lack of experience working in a new target market segment, and the second is the inherent risks in adding new products. Diversification is a double-whammy when it comes to risk.

If you are interested in pursuing diversification as a marketing strategy, we can help. Contact us today to discuss all your business needs and provide software and services to help you grow your business.

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