Look at adjacent markets

Once your small business has achieved a steady foot-hold in your initial target market(s), it might be the right time to diversify.  The right time for this will ultimately depend on your business and the size of your initial market.

If you have chosen to focus on a relatively small, well bounded niche (say, small accounting firms within 1 hour from your office) your business is quite vulnerable to a turn down in the fortunes of this niche.

You would be wise to add a second niche to provide more resilience within your business, should your initial niche hit lean times.

Once you have added a second niche and it is performing well, then move on to a third niche and continue to broaden the business as it steadily grows.  This form of organic growth makes it relatively easy to create a flexible organisational structure which can sustain significant long-term growth.

Your choice of second and subsequent niche markets is key and should be given considerable thought and evaluation.  The wrong choice will cause you to spend too much time and effort in getting operations in your new niche running smoothly, meaning you reduce your efforts in your more established niche(s).

When you are evaluating whether or not to move into a particular new niche, your first criteria is that it be adjacent to your current markets.  Secondly, it has to be a niche into which you can sell your existing products/services.

In our earlier example, your company was selling products/services to local accountancy firms.  Your second niche might be solicitor firms in the same geographical area who would buy the same products/services.  Should your accountancy prospects find their business pressures change so that their rate of buying your products/services slows down, your solicitor prospects will, most likely, keep buying.

When you are looking for a new niche, there are three key questions to answer:

  • How well do we know the prospects / the market?
  • Will they buy our current products/services or do we need a new range?
  • How will we resource this expansion?

These three components – new market, new products/services, new people – will dictate the level of risk your diversification will introduce into your business.

If you plan to move to a new market (one that you don’t understand, with little historic involvement) with a new range of products/services that are to be sold by a newly appointed sales team, then your risk of failing is very high.  There are too many unknowns and uncertainties that makes your chances of success very low.

You would be wise to limit yourself to just one unknown element.

Assuming your diversification is to broaden your client base, the most likely unknown factor will be the market you are moving into.  When you decide to focus onto a new market sector, it is rare to find you know it well enough to eliminate the associated risks.  This, therefore, represents the one unknown that you should proceed with.

What this means is that you really should sell into this new sector using your existing staff, selling your existing products/services.  These last two components are well known to you and, therefore, represent little risk.  The last point to think through carefully is this.  If you are planning to switch existing sales staff to sell into this new market, how does this impact your sales activities in your established market(s)?

It may not be sensible to divert your sales staff to a new territory because of the negative impact it would have on your existing prospects and clients.  Getting in new sales staff to work alongside your current team might have to be the first step in the process.

ACTION IDEAS

  1. When looking to diversify, concentrate on having only one new unknown element in the mix.  Avoid the ultra-high risk approach of selling new products into new markets with new people, however attractive the business plan.
  2. Develop a transition plan to guarantee your existing clients and prospects suffer no inconvenience at the time you focus onto another new market.
Posted in Competitor / Market Knowledge