By SueCanyon | August 28, 2007
So, you’ve saturated the market with your best product, or someone has talked you into another product that will ‘sell like weeds’, or you’ve just gotten bored and think a new approach will breathe new life into your business. Apply some strategic sense to the new venture, product, or market by taking on only one single learning experience at a time.
For instance, let’s say you own a company that specializes in paving parking lots. Your best salesman recommends that you begin selling the paving of residential driveways. It seems like it might be an easy transition to make, but let’s examine the changes involved.
First, your typical customer for parking lots is a commercial entity. The typical customer for driveways will be a residential customer, most likely, a private individual.
A positive attribute to this scenario might be that the commercial entity will likely ask for terms and pay you in 30 or more days, depending on your contract terms, whereas you can request terms from the individual of half down and half upon completion of the work. You will likely be able to charge more for the residential work than the commercial work from a square footage or cubic yardage basis.
However, that’s where the positive benefits of the new venture end. You are taking on a new customer group. This group will expect a different level of service than the commercial contractor. The contractor will point you to several large jobs, the residential customer will give you only one small job. In any business, it is better to go toward a ‘manufacturing’ type model rather than a job-shop model. The larger the job, the closer it will seem to the manufacturing model. The higher number of jobs from one customer, the easier the relationship management will be, and the easier the sales will be.
Residential customers are not in the business of needing pavement on a regular basis, and therefore know little about it. Therefore, they will need more hand-holding, they expect a higher level of esthetics, and you should expect more call-backs.
At the same time, the jobs will tend to be smaller, therefore you will have more equipment moves, more windshield time, more interface between the paving crew and the customer, and possibly more logistical trouble with neighbors and cone-setting, etc. While the bids may be more lucrative, they will probably require more customer service time.
This move might strain your office staff while causing your crews to get less work completed in a day. If your prices are not sufficiently high enough to cover the field inefficiencies and extra office needs, your profit levels will suffer.
This example has caused us to change to a new and more time-consuming customer base, and at the same time changed to a product with which we are unaccustomed to working. This scenario represents a double learning experience, which can be dangerous for many companies.
However, consider an example that at first may seem a little outrageous (sometimes I use outrageous examples to spur thinking in a new direction). You may have, on-site, a suitable shop in which to repair your paving equipment. Your shop manager is very capable and efficient. If you were to expand your product line to include the repair of paving equipment, you may be able to increase your revenue by repairing equipment for other paving companies.
In comparison, your terms will remain the same, you have plenty of information upon which to base your prices, your customer base will ostensibly be just like you, and you may even know most of them. You don’t have to buy any inventory because the parts can be ordered same-day just as you do for your own equipment. Therefore, there is only one change to be mastered, that your mechanic may have to manage another mechanic or two.
When looking to expand, do your best to seek additional revenue streams that will require only a single learning experience. Here are other factors to consider.
Geographic considerations. You think you should expand into paving parking lots in a nearby town. Again, you have more windshield time, but the customer base will remain very nearly the same. If you were to work this option for a while, you might get the windshield time figured out, and once you did, you would be closer to incorporating the driveway product into your revenue scheme.
But, if the nearby town was in the mountains, and your crews were used to paving on nearly flat ground most of the time, that might be another learning factor to master.
Selling to customers from the Bible Belt is a significantly different matter than selling to customers in California, which is different from selling to customers in New York.
And any new brick-and-mortar customer will be easier to deal with than going into internet sales. Please make sure that when you decide that you need a web presence and that you’re going to sell over the net, that you have enough money to fund the project, to hire into that weakness. Because if you try to do it yourself, it is likely that your core business will suffer from lack of attention.
There are many choices when strategically deciding to expand. In marketing terms, your choices are these:
•§ to get a bigger piece of the pie perhaps by lowering your prices or having better quality,
•§ make the pie bigger by creating a market where one did not exist as in when China opened up, or
•§ sell a different pie by straying from your niche.
•§ Then there is the Forward Integration concept which involves buying your customer,
•§ Backward Integration or buying your vendor, and
•§ Vertical Integration or buying your competitor.
All but one of these strategic concepts assume that you are remaining within your niche. The one remaining strategy requires selling a new product, therefore straying from your niche. Unless you have exhausted all opportunities within your niche, examine very carefully what your organization will have to learn when you decide to pursue a new product.
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