Expansion Options by Risk
Peter Kang is co-founder of Barrel Holdings, an umbrella company that owns a portfolio of agencies (all small businesses.) He recently announced a new productized services offer in the form of a creative agency, Bolster, that offers sub $30k logo and branding for service firms, B2B tech start-ups, and non-profits. Peter is taking a product he knows well and positioning to sell in new markets.
There are three other ways you can grow an existing business, each with their own consequences. Below is a product market grid that lays out your options here:
In the green first quadrant, you can expand by focusing on improving your existing product’s fit with the existing market. This might look like:
- Raising pricing.
- Improving your marketing to reach all available customers or getting existing customers to buy more with promotions.
- Improving your product to better meet the needs of the market so that customers buy more of it.
- Lowering costs to produce the product.
This quadrant is green because the risk and ease of generating a return here is often lowest.
The primary activity here is squaring things away.
At some point though, you hit low returns on optimization or the market shifts away from your product. After this, innovation becomes a more attractive approach to expansion.
Innovation is inherently riskier than optimization.
The lowest risk starts with what Peter is doing, taking a product you know well and positioning it in a new market. It’s not risk free because different markets value things differently and have different competitors. Peter might find that tech startups “get it,” but non-profits don’t, and service firms prefer using cheap freelancers who do mediocre work.
Next riskiest is introducing a new product to your existing market. It’s slightly more risky than taking a functioning product to a new market, because of the cost of product development and maintenance. Every product or service you offer has concurrent overhead: people, resources, and systems that have to be managed to deliver value.
Finally, you have a new product in a new market. This is where all businesses start and it’s riskiest because there’s a huge learning curve about the product and the market.
The primary activity here is figuring things out.
Green Makes Green
As entrepreneurs we’re attracted to the new, but for most businesses most of your activity should be in optimization. Being better at making your product and making it better for your market. (Note to self: call this “The Most Most Better Better Rule.”)
You can’t stay on green forever, but it’s definitely where you should start. Beyond that, your best chance of returns is in limiting the risk in product or market by working in areas you at least partly know.
About the author
John's first foray into business was in 2008 when he started as a freelancer responding to ads on Craigslist. He managed to survive those clients and eventually build a web development agency that provides him a good deal of freedom. He's a Zend Certified Engineer, a graduate of Goldman Sachs 10,000 Small Businesses, and speaks across the US and Canada on using digital strategy to support organizational goals. Outside of work, he's bouldering, diving, sailing, and traveling.
This post was originally published on Knight Errant.