Research from the 2001 recession shows that small businesses and startups are at the greatest risk during economic downturns. Even during times of prosperity, only about 20 percent of startups succeed.
However, the percentage of startups and small businesses that do succeed usually have one thing in common.
If all of your revenue comes from one product line, you will be out of business if the market shifts. However, if you add additional revenue streams, your entire business will be more secure as it will enable you to survive even if one revenue stream is slow.
What is diversification?
Diversification is adding another income stream to a business. For example, if you currently own a blog and your primary revenue stream is affiliate marketing, you could diversify the business by adding a physical product or even coaching courses.
By adding additional revenue streams, your business will continue to thrive even if an affiliate offer fails. However, if your business depends entirely on affiliate deals, your revenue could drop to zero if one deal fails.
Small businesses that invest in diversification also experience more rapid growth than those that do not invest in diversification. Research shows that 47 percent of diversified businesses achieved over 10 percent average annual revenue growth, while only 32 percent of businesses that did not diversify achieved over a 10 percent average annual revenue growth.
Here are some tips for implementing a diversification strategy for your business and examples from some of the fastest-growing SaaS businesses.
1. Offer different levels of your product
One of the easiest ways a SaaS company can tap into a larger market share is by offering different product levels.
For example, if you currently only sell to enterprise customers, you may consider offering a lighter version to mid-sized businesses. Most highly successful SaaS companies, including Hubspot, Salesforce, and Slack, all offer various pricing tiers for enterprise, mid-size, and small businesses.
To create a lighter version of your product, you may limit the features or the usage numbers (number of reports, number of campaigns, etc.).
Once you have a few different product levels, price each one intelligently. For example, Groove increased its revenue by 25 percent by simplifying its pricing strategy and making the purchase frictionless. If you have too many options or make the pricing strategy too customizable, potential customers will be overwhelmed by the options.
Additionally, if you choose to expand by offering a lighter version of your product, be sure to allocate your business resources properly. For example, Spincart found that their smaller customers were consuming the majority of their customer support resources. By adjusting their pricing model from commission to flat-fee pricing, they were able to shift 80 percent of their resources to the 20 percent of high paying clients. As a result, their revenue tripled.
2. Offer a parallel product
While your SaaS product solves one of your customer’s problems, they likely still have other problems in the same space. For example, if you offer an SEO tool around keyword research, your customers may also want a course on keyword research. Therefore, you can dramatically increase your revenue by offering a parallel product without increasing marketing spend or driving more traffic.
AppSumo is a great example of how offering a parallel product can increase revenue. The company offers promotions for various software companies, though after noticing their revenue flattening, AppSumo decided to diversify by offering a course.
Many of their customers asked how they built AppSumo, so they created a course showing exactly how they constructed it and how other people could achieve similar results. The course was not only successful, but it ultimately generated an extra $5 million in revenue.
Launching a new product requires research
The key to offering a successful parallel product is to conduct thorough customer research. Document common questions your customers ask or any products they want. You can also look at popular blog posts to learn specific pain points your audience has.
Once you have a few ideas, send an email to your customers with the list and ask which product they would be most interested in purchasing. Offer a pre-sale on the product and then build it if you generate enough pre-sales. If you don’t generate enough pre-sales, you can always refund the money.
If you don’t want to build an entirely new product and you have some cash on hand, you can also purchase an existing business. For example, Salesforce’s latest growth strategy is acquiring startups. They recently added eight new businesses to their portfolio and are now a leader in merges and acquisitions. Rather than trying to create a competing product, acquiring a similar product enables instant access to a loyal customer base and allows them to up-sell customers to other Salesforce products.
3. Expand your market
Most successful startups begin by tailoring their product to one specific niche. However, as you gain traction, you’ll eventually be able to branch out to a wider audience.
For example, if you currently sell a SaaS product to hospitals, you may choose to expand by also marketing to dentists.
Another way to expand your market is by targeting a different geographical market.
An example of a brand that’s successfully expanded into other geographical markets is Neil Patel. While the brand originally targeted the U.S., he soon realized that marketing in other geographies was much cheaper. Their tool Ubersuggest now reaps the rewards of his global marketing campaigns.
Diversification is similar to insurance for your business. If you don’t diversify, your business will only exist as long as that one revenue stream survives.
While it’s wise to begin with one revenue stream, begin thinking about how you can add diversity to your income. If you’re not sure when to begin diversifying your business, look at your revenue and customer satisfaction ratings. If your customers are happy and revenue is flat, you may not have much more room for growth and should therefore turn to diversification.
You can also look at your competitors and see if there’s more room to grow in the market or if you need to diversify.