Should You Diversify Your Products?

4 min read • Sep 05, 2021 • Barry Eitel

Diversifying your company by exploring new fields and industries makes sense for a lot of small business owners. Like cells multiplying, adding new facets to your core business seems like it would expand your income stream automatically.

However, diversifying the types of products or services you sell isn’t a guaranteed profit multiplier. There are reasons you might want to stay specialized and niche.

Lots of people shop at Walmart, sure, but many customers might want to buy items like furniture, produce, or clothing from a high-quality, specialized retailer. There are benefits and disadvantages to each approach.

If you’re interested in diversifying your product offerings, you should know that the process requires planning, research, and an appetite for experimentation.

Reasons to Stick to Your Core Business

If you’re considering diversifying your business because it’s currently flailing, most experts recommend that you rethink this approach. Diversification can spread a struggling business too thin and shouldn’t be seen as a Band-Aid.

“If your current business is floundering, we’d suggest resisting the temptation to diversify,” small business experts Doug and Polly White explain in Entrepreneur. “Diversification may seem attractive; the grass is always greener on the other side of the fence, right? Unfortunately, though, diversifying will inevitably increase the complexity of your challenge and therefore reduce your probability of success.”

A healthy company will have a bigger chance of success with a wider product line, and if the gamble on new revenue avenues doesn’t pay off, the core business is still there.

“If your core business is not succeeding, you may make the decision to shut it down and launch a new venture,” the Whites continue. “However, if you aren’t ready to throw in the towel, we suggest that you work to push your current business into the black before diversifying and increasing complexity.”

Even if your business is doing well, before diversifying your products or services, consider expansion first. You already know your core business—maybe opening a location in a new city or pumping up your marketing budget could become a better use of your resources than chasing something completely new.

When Does Diversifying Your Business Make Sense?

When considering diversification, think strategically. This is why it’s better to diversify if you aren’t currently under the pressure of trying to save your business from going under. Think about how your business could leverage a customer base, competitive advantage, or asset.

In the 2000s, Ian Taylor—an entrepreneur in the United Kingdom—launched an advertising company that placed mobile digital billboards on vans. Over the years, he determined that he could leverage his digital screen marketing technology to create dynamic ads on bicycles and stationary units. His company even offers in-house production for the ads.

“It was the eye-catching and engaging mobile display vehicles that highlighted the potential for the product in other areas, for example, where clients wanted to use digital imagery at dedicated locations, often on a temporary basis,” Taylor told the Guardian. “When you start a business, you have a vision. You start selling your product, but you are always mindful of the fact that other people could design and develop a better one very quickly, so you have to focus on your product development strategy.”

Often, you might see how your company could diversify into areas that are similar to your core business. Maybe you could add a service related to a product you sell, or vice versa.

How to Diversify Your Business

To diversify your business, first list all the ways your core business could be leveraged to a competitive advantage.

“When facing the decision to diversify, managers need to think not about what their company does but about what it does better than its competitors,” writes Constantinos Markides in the Harvard Business Review. “In one sense, pinpointing strategic assets is a market-driven approach to business definition. It forces an organization to identify how it might add value to an acquired company or in a new market—be it with excellent distribution, creative employees, or superior knowledge about information transfer.”

Think about what types of companies are adjacent to yours—if you sell clothes, it isn’t much of a stretch to diversify into selling accessories. This could also involve diversifying into adjacent services, like selling ad design along with your digital billboard business.

You can also think about your core business’s infrastructure and how that could be leveraged into diversification. If your core business doesn’t use up all the space in a brick-and-mortar location, for example, that space could be used to sell something else. Relatedly, a large fleet of vehicles could be used for many different reasons.

With some research, patience, and trial and error, there is probably a good argument for you to diversify your offerings. However, just because you can diversify your business doesn’t mean you should—consider all your options before making any hasty decisions.

Barry Eitel

Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.