To consider the potential payoff of product diversification, let's start with an example.
Lululemon, an athletic apparel company, was founded in 1998 with one core product: yoga clothing for women.
If you've been to a store recently, you've likely seen how far beyond women's yoga-clothing Lululemon has grown.
For instance, my brother now buys all his button-down shirts and work pants from Lululemon.
Additionally, last week I bought a bathing suit from the shop.
On their Our Story page, Lululemon states: “Our first designs were made for women to wear during yoga. Through plenty of feedback from our guests, ambassadors and elite athletes, we now design for yoga, running, cycling, training and most other sweaty pursuits for women and men.”
This is an example of effective diversification in-action. Here, we'll explore what diversification marketing is, and how it pertains to your marketing strategy.
Why diversify your product offerings?
There are three reasons a business might choose to diversify its existing product line:
- You've reached the ‘limit' on the amount of people you can convert in a market segment.
- You've identified a new product or service that complements the needs of your existing customers.
- You've decided a new level of growth can only be achieved through addressing new market segments.
Let's dive into the difference between the three of these reasons, now.
First, perhaps you've reached the limit of the amount of people you can reach in a market segment. If you created a niche product or service, you might've spent the last few years marketing your product to your core audience demographic.
Eventually, you'll reach your limit of potential people you can reach and convert within that audience segment.
For instance, GoPro started out selling HD cameras for sports and adventure. However, there are only so many people they can target with GoPro cameras — which is likely why they expanded to camera accessories, and even lifestyle gear, including backpacks and clothing.
With an expanded product line, GoPro can now target audiences who are looking for outdoor gear, along with audiences who are searching for HD cameras.
Second, perhaps you've identified a complementary product or service to the one you currently offer. To identify complementary products or services, consider what goal(s) your products help your customers achieve, and what other tools or services they need to achieve those goals even faster.
Mailchimp, as an example, started as an email marketing tool. Now, the company has diversified its product offerings and expanded into social media tools and even website builders.
Mailchimp created an email marketing tool to help customers reach new audiences and convert those audiences faster. Social media tools and website builders, then, are natural extensions of that primary goal.
Finally, a third reason you might diversify your product offerings is simply to reach and convert new segments of customers. This is less of a brand-new product or service, and more of a tier-method in which you have the same product with varying features depending on audience segment.
An example of this is a software company that initially targeted small businesses, and is now expanding into the enterprise audience segment.
To successfully expand, you'll need to ensure your new product features accurately address enterprise users' needs — which will be drastically different from your small business clients'.
Another example is a sports shoe company that continues to create sports shoes, and doesn't diversify its products or services beyond sports shoes. However, the company does start creating different lines of sports shoes to address different audience segments: including tennis players, golfers, and joggers.
Advantages and Disadvantages to Product Diversification
There are a few major benefits to diversification, including:
- Minimizing losses: Ever heard the term, “Don't put all your eggs in one basket”? That's the premise of this advantage. Basically, if one of your products underperforms, you'll be able to minimize company revenue loss if your other products are performing well or better than expected.
- Increasing brand recognition: If Apple only sold computers, it probably wouldn't be the well-known brand it is today. But since the company has expanded into smartphones and music players, it's expanded the amount of customers who use an Apple product. As customers increase, so does brand recognition.
- Increasing customer lifetime value: By expanding your offerings, you're increasing opportunities for customers to find value in your brand — which could increase brand loyalty. For instance, if Lululemon just offered yoga pants, I probably wouldn't be such a big fan. But since I can get workout clothes, work clothes, and even swimwear from them, my loyalty towards them is high.
If you create a tier-program in which you offer additional product features for varying phases of a business, you're minimizing the risk that your customers will outgrow you.
However, there are also risks associated with diversification. A few major risks include:
- Brand dilution: People no longer associate your brand with the product or service you your were initially known for, and they're unsure how your new products relate to your business mission or values.
- Resourcing limitations: You don't have the budget or headcount to effectively create new products or services, or your marketing team doesn't have the resources to properly target a new market audience.
- Inconsistent support for additional products: If your support team isn't prepped to handle the new complaints or challenges prospects and customers are facing with your new product, the industry's overall satisfaction with your brand could decrease.
Marketing's Role in Diversification
If your company is diversifying its product portfolio, your marketing team plays a major role in the success of that expansion.
Among other things, your marketing team is likely in charge of market research (including your new segment's unique challenges and pain points), product development (i.e. ensuring your product successfully meets your target audience's needs, especially as those needs evolve over time), and creating a successful product launch.
Ultimately, your marketing team needs to learn how to target your new market segment — which might be difficult if your brand hasn't targeted that audience in previous marketing campaigns. (To learn more about audience segmentation and targeting, take a look at The Marketer's Guide to Segmentation, Targeting, & Positioning.)
And, just as importantly, your marketing team needs to mitigate some of the risks associated with diversification.
For instance, marketers can minimize brand dilution by telling a comprehensive story to the public that outlines why these new products or services make sense to your business' vision, goals, or overall mission.
A marketing strategy that worked well for one product won't necessarily work well for another — so it's critical, as a marketer, you remain flexible and open-minded to pivoting to properly address the needs of these new customers.
When done properly, diversification is an incredibly exciting opportunity to fuel long-term growth … Just consider the growth Lululemon has seen since making the courageous leap into apparel beyond women's yoga clothes.