An Introduction to Product Diversification Strategies


Rashmi Sharma Hacker Noon profile picture

Writer, Researcher & Marketing Specialist at Shiprocket

Trying to diversify products can be a daunting task. It is hard to implement that most businesses soon give up, realizing that they’ll have to cut their losses and accept defeat.  

To increase profitability and achieve higher sales volume from product diversification, business owners should be careful not to become complacent. To keep the ball rolling, an entrepreneur or a startup with a new idea must face most people’s expectations. It is useful to begin discussing product diversification from a business viewpoint by looking at why any company exists. 

Typically, eCommerce companies provide quality products and services and deliver these to their target market clients. Product Diversification is a tried and tested strategy for growth. A company should also consider its objectives before making tangible steps for product diversification. Product diversification is a costly affair, so the budget should be decided accordingly. Businesses also need to determine if their teams already have the production capacity and staff to expand.

Product Diversification Strategies

One of the most effective ways a business can diversify its products is by implementing Concentric Diversification, which expands on a line of products that a company already offers. One example would be a clothing store that adds accessories to its line. 

Alternatively, Conglomerate Diversification is when a company adds new products or services to its current offering. The eCommerce companies may adopt this strategy to attract an all-new group of customers. The high growth and ROI in a new market segment may prompt a company to take this option. 

The Horizontal Diversification strategy is about adding a new product or service and selling it to existing customers. Diversifying into the same product category is a more appealing option than venturing into new markets.  

Product diversification can be different from business to business. The strategy to diversify products will depend on how much effort and money has been invested in it and how much of a risk a company is prepared to take. Brands often diversify their products in the wrong direction. 

Product Diversification Challenges

Due to the diversification strategy, reliance on single-line products is reduced, and a company faces new challenges. Thus, expanding into new markets requires additional expertise in producing and selling different products.

A company must conduct Porter’s three tests to check if diversification will be successful.

The three tests are:

The Attractiveness Test: This test addresses if the new market being entered can give the business long-term growth. 

The Cost of Entry Test: Evaluate how expensive it to enter the new market and how much you’d spend.

The Better Off Test: Look across business operations to evaluate what skills are used and applied for the diversification process.

It is worth using these tests to create a new product and to diversify in the new markets. Remember, when going for product diversification, some adjustments should be made to succeed. Also, Porter’s three tests work well in conjunction with the repricing, repackaging, product extensions, resizing, repricing, and renaming techniques to diversify the existing product line. 

Product Diversification Benefits 

There is no magic bullet for business success. But those who have gained substantial recognition and presence have paid close attention to what their customers want and rely on trends to create memorable buying experiences. Here are several reasons for eCommerce companies to rely on product diversification strategy.

Using existing products and services involves moderate to significant risks. Therefore at this point, the spending patterns of the people also change. Product Diversification can help create a balance for the entity during these ups and downs.

An aggressive growth strategy will always bring unpleasant surprises for eCommerce companies. The diversifying plan also helps in balancing such situations. 

External threats can also arise in the form of new competitors. Certain industries may fall for these specific reasons and due to economic factors. Diversification can help counter all these threats by spreading business risks across various markets. Cross-selling is also possible with the diversification of products. It also allows selling existing products to new markets or vice versa. 

Conclusion

Product Diversification is a byword for growth in ecommerce and a way forward for businesses to expand in the right direction. The rewards of product diversification strategy are beneficial in the long run, so it should be an integral part of any business.

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