Building & growth

What are the benefits of revenue diversification?

Written By

Ryan Craggs

Graphic illustration of money stacks and coins with arrow pointing up on a red-blue background | Ways to diversify revenue for your startup | Mercury
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Regardless of what stage of growth your company is in, as a founder, you need to continuously be on the lookout for ways to ensure your business can thrive. Turning a profit is hard enough, but even if you reach profitability, hinging your business's future on one line of revenue can prove a risky game. All it takes is one breakdown in production or one market shift, and suddenly your cash flow could take a major hit.

In a volatile economy with changing interest rates, competition from mega-corporations, and ever-evolving consumer habits, you have every reason to wonder if you've risk-proofed your business to cushion it from financial fluctuations. One way to help ensure that your company remains viable and capable of weathering the unexpected is through revenue diversification.

What is revenue diversification?

Revenue diversification is fairly simple in concept: it’s when a company offers new products, new services, or expands into new markets. The company does this to reduce risk and to increase market share. Think of it as finding a way of reducing your company’s dependency on any one singular thing succeeding, rather than putting all your eggs in one basket.

Take Apple as an example. The company started out with computers as its core product. But today, it's arguably known best for the iPhone. And there are also AirPods, iPads, and Apple TV+, all of which are distinct revenue streams. If Apple never ventured out of home computers, there's a chance it might not exist today. (Just look at what happened to Gateway, Inc. or Compaq Computer Corporation).

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What are the benefits of revenue diversification?

From shielding your company from financial fragility to unlocking new opportunities for long-term growth, here are some of the different ways that revenue diversification can help your company in the long run.

Risk reduction

Just as it's usually not wise to invest your entire savings into one stock or to have all your cash tied up in one account, diversification allows a business to avoid a single point of failure. All it takes is one market shift, a new competitor, or a production bottleneck to throw off your business model.

Kodak is a good example of this. Once the standard-bearer for film and producing photos, Kodak failed to anticipate the rise of digital photography and instead focused on its core product: physical photos. Consumer demand shifted in the 2000s from developed prints to digital images, and eventually, to photos on mobile devices. By failing to pivot or expand in response to a rising shift in the industry, Kodak sealed its fate as a company stuck in the 20th century. And once consumer demand for physical photos dried up, that led to the company filing for bankruptcy in 2012.

Creating new, potentially more profitable products

When a product or service proves successful, companies frequently look to expand their offerings to capitalize on that success. This expansion can entail extra features in an existing product or introducing a new product or service.

Sometimes a company's new product is a hedge and simply adds to what it already does well. Take Airbnb for example: along with offering home rentals, the company expanded into experiences, where customers can book tours, classes and other cultural events. Now your trip to Rome can include a place to stay, meals, and a tour of the Colosseum — all organized via Airbnb.

Other times, the new product can even eclipse the original and lead to unimagined growth. Netflix originally built its business on DVD rentals delivered in red envelopes to customers' mailboxes. Eventually, customers were able to rent physical media along with streaming a limited library on phones and computers. Today, Netflix is synonymous with streaming. If it had stuck to physical media only, the company would have missed out on the streaming industry altogether — one that's predicted to account for $1.7 trillion by 2030, according to Precedence Research, a Canadian market research firm.

Improve customer lifetime value (LTV)

Customer lifetime value (LTV) is another metric that benefits from diversification. Your company already has plenty of data on your customers; you know what they like and what they don't, and that knowledge provides a path for new ways to upsell and cross-sell.

Consider again the Apple example: while the iPhone has propelled Apple's massive growth and profits over the last 15 years, iPhone sales declined toward the end of 2023. But as hardware sales declined, Apple's services wing grew: subscriptions, licensing fees, and Apple Pay drove $21.2 billion in sales in Q2 2023, making up Apple's most profitable business. And beyond just buoying the business, these extra services increased LTV, as once someone is into the Apple ecosystem, they're more likely to pay for and utilize other Apple products and services.

What are some ways that startups can diversify revenue?

When startups want to diversify revenue, they've got a number of different options — creating new products or services, expanding into new markets, and even acquiring or partnering with other companies are just a few. The key to finding new revenue streams is being flexible and creative about what's possible.

Creating new products or services

Your company can innovate in all sorts of ways by creating new products or services. It presents not only an opportunity to address evolving consumer needs, but also pushes business forward, promoting growth and relevance in competitive markets.

Let's say you run a social media marketing firm. Your customers have been happy with the results and your business is growing. This is all well and good, but unfortunately, the forces that inform your success aren’t wholly within your company’s control. All it takes is an algorithm change on one platform or other, and those positive results could take a turn for the worse.

To hedge the risk when your company’s success is largely at the mercy of external factors outside of your control, you can start offering other services — search engine optimization and live events are just a few ideas. These new services can help both grow your business and mitigate dependence on one source of income. Whether a new business idea is viable comes down to product-market fit.

Subscriptions and consumption models present another avenue to offer new products and services. Maybe your original service costs $10 a month. As you grow your customer base, you see an opportunity to offer a tiered service: The original service now costs $12 a month, and a new premium service costs $15 a month. That small disparity might drive customers to opt for the premium service since it's only a difference of $3. Or maybe you go for a consumption model instead; customers pay for a finite amount of credits, and once those credits are used, they have to buy more.

Expanding into new markets

Venturing into new markets fuels growth, explores untapped opportunities, and positions your business to diversify its customer base. At some point, you'll likely saturate your original market. Expansion into new territories allows you to keep building bigger.

Maybe you have a startup that specializes in bringing project management tools to market for small to medium-sized tech companies. As a U.S.-based company, you’ve spent the past few years growing your customer base across main tech hubs across the U.S., including in New York City and San Franciso. After a while, you might decide to diversify revenue by venturing into new markets outside of the U.S., starting with tech hubs in Europe. This is an opportunity to enter a diverse economic landscape with a wide range of industries and business sizes that will turn into a whole new customer base for your company.

Acquiring or partnering with other companies

Strategic growth can come in a bunch of different forms, and understanding the landscape of competitors and potential partners can position your company to branch out in a variety of ways. Maybe you can bundle a service you offer with the service another company offers. Or maybe you've got the capital to buy another business and offer two different products that help hedge your bets. There's no one right answer.

Let's say you've created an image-editing app that's gaining lots of buzz, but you don't have a huge user base. Maybe it's time to partner with a player in the image-sharing space and license your software to its users. It’s a synergistic partnership that can provide mutual benefits: your company will gain access to a wider audience, potentially increasing your user base and revenue, while the image-sharing platform you’re partnering with can enhance its value proposition by offering advanced editing capabilities to its users.

However your business diversifies, it's important to put the time and research into examining product-market fit. In the end, there's no one road to making a company thrive, but revenue diversification is a great way to move down the right path.

Written by

Ryan Craggs

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