Take a lesson about business growth from one of the world's richest entrepreneurs:
"I don't try to jump over seven-foot bars; I look around for one-foot bars that I can step over." —Warren Buffet
In 1957, Igor Ansoff, a Russian-American with a PhD in applied mathematics, developed a model that has served as the foundation to corporate growth strategies for more than five decades.
Called the Product-Market Growth Matrix, it established a framework for looking at the risks inherent in business growth. While his analysis isn't as pithy as Buffet's, it helps grade the strategic risks that fall between the one- foot and seven-foot bars.
The principal of the model is simple. It's cheap, easy, and safe to sell stuff that people already want to people you already know. It's expensive, hard, and risky to blaze new trails with new products or services in unknown markets. In between is, well, in between.
While something of a hybrid between Ansoff's and Buffet's advice, here's a summary of growth strategies from the least to most risky.
Sell More Stuff to Existing Customers
The easiest, cheapest, safest way to grow your business is to sell more stuff to existing customers because both are known quantities.
- Build customer loyalty (i.e., frequent buyer cards, low price guarantee)
- Encourage customers to buy more (i.e., "buy two get one free," quantity packaging, "best results with frequent use," a.k.a. double the dose, double the gross)
- Offer extended memberships, multi-year discounts, etc.
Sell the Same Stuff to New Customers
This involves grabbing market share by wooing customers away from competitors. It introduces some risk because you're dealing with new faces, but a long as you don't venture into new markets, they should be similar to your existing customers.
- Honor competitor coupons
- Guarantee to beat competitor prices
- Establish a "refer a friend" program for existing customers
- Exploit your competitor's weaknesses (i.e., Burger King's "Have it your way" campaign)
Sell Other Proven Stuff to Existing Customers
In this approach, you expand your product mix with market-proven products and sell them to existing customers.
- A coffee shop adds a selection of herbal teas
- An energy drink company takes on an existing line of supplements, energy bars, etc.
- An accounting firm partners with an investment advisory group
Sell Newly Developed Stuff to Existing Customers
To wring more sales out of your existing customer base, you can also grow by developing related products. Obviously, this is riskier than adding known products or services because it carries product development risks.
- A specialty jam manufacturer develops a line of fruity salad dressings
- A bicycle manufacturer develops a self-fixing tire
- An athletic shoe company develops a line of sports clothing
Sell Existing Stuff to New Markets
While you might make a case that the product development element of the last strategy carries more risk than moving into new markets, most experts agree that selling to existing markets is far less risky than selling to new ones where you have no experience.
- Expand a local brand to national or international markets
- Develop new distribution channels (i.e., licensing, distributorships, marketing partnerships, brand alliances)
- Develop pricing strategies for different markets (i.e., educational, non- profit, military, left-handed, etc.)
- Develop niche marketing programs (i.e., sell the same product with marketing aimed at different markets such as seniors, students, singles, etc.)
Diversify Into Entirely New Markets
This is the highest risk, highest cost approach to growth because it suffers from both product and market risks. In the case of growth through acquisition, as is often the strategy, it also introduces a variety of financial, cultural, and management risks. It's not a good place for the weak of budget or nerve. Remember, the pioneers were the ones full of arrows.
Here are some examples:
- Time Inc. and Warner Communications Merger
- General Electric adds financial services (GE Capital)
- Pepsi / Frito-Lay Merger
If you want to grow smart, let the big boys spend the time and money to hoist their mass over the high bar while you step lightly over the low hurdles.
Over the past thirty years, Kate Lister has owned and operated several successful businesses and arranged financing for hundreds of others. She’s co-authored three business books including Undress For Success—The Naked Truth About Making Money at Home (Wiley, 2009) and Finding Money—The Small Business Guide to Financing (2010). Her blogs include Finding Money Advice and Undress4Success.