What does revenue diversification mean?
Businesses can reach their full potential by growing into new markets, adding to their product line, and providing more services. This is called revenue diversification.
For instance, Uber’s primary source of income is its taxi service. Uber Eats, Uber Freight, and specific services now bring in a lot of money for the company.
Revenue diversification helps businesses reach more customers, lowers their risk, and gives them a long-term competitive edge. Most of the time, the best idea isn’t the first one that comes up. As a business grows and develops, it always makes mistakes.
Amazon used to sell books online before it turned into an “everything” shop. There were sales of music and video games in 1998, three years after Bezos started the business. Amazon is active in cloud infrastructure, streaming services, robotics, artificial intelligence, and selling every product you can think of.
Revenue diversity is something that all businesses do at some point. Amazon is just one well-known example.
Like words
- Multiple sources of income
- Multiple ways to make money
Reasons to Use More Than One Source of Income
A diversified income stream spreads out the risk, just like a diverse investment portfolio would be considered a safer bet by a financial advisor. They also help companies fight in more than one market.
Depends less on one source of income.
For a business, having more than one source of income makes things more difficult if something goes wrong. The company loses its power to make money if that one source stops giving it money. They are now trying to find a replacement.
It’s a fact of business that customers will leave. Vendors have no power over things like budget changes that always happen. Having fewer accounts to rely on makes losing each customer harder, especially when the economy is terrible and sales are declining.
Spread the risk of money.
It’s great when a business makes $10 million annually in ARR. But what if one business account brings in 25% of that ARR?
One competitor could make a product that met that customer’s wants better, whether through better service, a key feature, or a lower price. It would cost the business $2.5 million to lose that account.
Having big accounts is good, especially if a business can keep them. But if it depends too much on just one or two, it could go wrong. It stresses the CEO and board and sends a wrong message to investors.
This can happen to any business, even one with clear customers. A lot more new ideas are being made than there used to be. A company on the S&P 500 had an average life span of 34 years in the 1970s. It’s now half that.
Different ways to make money are the only way a business can protect itself from a competitor “out-innovating” it.
Keep up with the competition in many markets.
Businesses can grow into new markets, use new technologies, and provide different services as customer needs change when they diversify their revenue.
In the beginning, Netflix sent DVDs through the mail. Their business has grown, and they are now streaming entertainment leaders.
Encourage new ideas
Product creation happens when people are clear, confident, and financially stable. Keeping the money coming in is a big part of this, but so is protecting against changes in the market.
Innovation is more than just putting out new goods. As a business boss, you need to be able to clear your mind and heart to make things happen.
Visionary plans don’t have much room when you’re in a hurry to get new users or find new ways to break even. Diversifying sources of income lets business leaders see the big picture and put more money into it, even if one part of the business isn’t doing so well.
Having a variety of cash streams will help the business succeed in the long run.
Widen your market reach.
Different ways to make money for the business make it easier to see what’s happening. Additionally, it serves as a link to other areas. If you already have a customer base, reaching new ones and moving into new areas is much easier.
Businesses can do this in a few different ways:
Talking to other people: A customer might tell someone they know about a different product or service after using a brand-new one. People who already know the company are likelier to believe other products from the same source.
Another great way to get the word out about a business is to cross-sell. This means taking advantage of customers’ wants and growing into a related area. For example, if you provide web hosting, it wouldn’t be out of place to offer SEO or website design.
“Upselling” means adding more items to an order to make it more valuable and reach customers with more significant needs. Many B2B SaaS companies have different pricing options for different types of businesses.
There is a 60% to 70% chance that current customers will become new customers, but only a 5–20% chance for new customers. Over 80% of people who buy something are loyal to at least one brand.
Customers are likelier to stick with a business offering more goods and services. Along with being better for business, that’s exactly what buyers want.
Pros of Increasing Different Types of Revenue
Diversifying your sources of income isn’t always easy, but it’s well worth the trouble.
Diversifying sources of income can help businesses in more ways than one, including lowering risk and dependence and:
- Get more cash flow
- Keep more than 100% of your net income (NRR) – Expand into new markets or verticals.
- Keep customers longer ·Lower the cost of getting new ones
- Make your business more well-known – Get an edge over your competitors
- Raise the lifetime value of each customer (CLV) – Allow for new product development and growth
- Make an investment pitch and get more money.
Differentiating your sources of income
There are a lot of different ways to make extra money. And they will be different for each business. Two direct rivals in the same industry may take very different approaches to increasing their sources of income, depending on their business models, the types of customers they serve, and the sources of income they already have.
On a large scale, these are the main ways a business can increase its income:
Get into more markets.
Companies go through a rite of passage every time they enter a new market. Once a company has successfully brought its product to market, improved its ICP, and set up ways to sell into it, the next step is to grow.
More significant customers, more industries, and different countries are great for a business. It truly opens up a world of opportunities.
A business can grow into new areas in several ways, such as:
– Opening a branch office – Going after the same kinds of customers in a different state, region, or country – Going after different kinds of customers in the same or a different area – Buying a company that has more goods, technology, infrastructure, intellectual property, or customers
Adding a new way to sell
Growth is based on the idea that a business may do well in one market, but that market is probably not the only one out there. It may not even be where you can make the most money. Companies can make more money and build a more substantial base by slowly presenting a product to new types of customers (or more of the same customers, but in different places).
Make new features, services, and products.
Companies often put money into making more of a service that is doing well. Adding a whole new product line or service could be part of that, or it could just mean adding more features to a current product.
A digital marketing company could offer extra services like a branding package or weekly coaching.
Someone who makes a lot of music might start selling things or starting a streaming business.
A software company might add changes to a product it already has. A store that sells sunglasses might start offering prescription lenses that fit its current frames.
Some businesses offer pick-and-choose models where customers can combine goods, services, and features into one package. This can offer more value to the customer. And that’s what brings in more money.
Diversifying a business’s income can also help it give customers a better overall answer. For instance, CPQ software is what DealHub does for a living. Over time, we’ve added more products to our suite, such as payment software and contract lifecycle management software, to make the platform work better together. Ultimately, the customer can do more in the program instead of switching between tools.
Offer tiers of pricing or subscriptions.
It’s easy to make a subscription business plan bigger. Because customers pay regularly and already have the systems to handle them, they can easily add more services or take features away from plans. Existing plans are used in the way mentioned above by subscription businesses, but SaaS does not just use them. There are a lot of one-time sales where B2C and B2B companies use tiered prices—for example, buying a phone from your carrier or of a certain quality from an online store.
The idea behind tiered pricing is to give more people more value for the same product.
A SaaS company can make an app for large businesses by leaving out all but the most essential features for smaller businesses.
A clothing brand can charge more for designer labels and give essential quality items to regular customers.
When people get a cell phone plan, the monthly data amounts vary. This way, customers can only pay for what they need without panicking about spending too much.
Both parties benefit from the deal. The business gets to serve more customers and make more money, and the customer gets something that fits their price.
Set up partnerships
Companies partner with each other to use the network and infrastructure of another business. Instead of starting from scratch, businesses can work together to offer discounts for customers who buy both goods simultaneously.
These are some common types of partnerships:
- Payment platforms and distributors
- Putting technology together
- Endorsements and efforts with influential people
- Working together on branding and marketing
Companies can make more money through partnerships, but they can also spread the word about their business. When two well-known names work together, it’s sometimes big enough to make the news. That can lead to free publicity that would be hard and expensive for a single business to get on its own.
