Diversification Generates New Revenue Source

Employees aren’t the only ones who can profit from diversifying their talents; business owners can use the concept of diversification to add new means of income.

Larry Brian, director of the Small Business Development Center at the University of Arkansas’ Sam M. Walton College of Business, said business owners can generate new sources of revenue by diversifying their products or customers.

“A lot of small businesses start because they provide something to one major customer,” Brian said. “Once [the business owner] establishes that relationship, it’s in their best interest to develop other relationships. If that one customer represents 80 percent of an owners’ revenue and if something happens to that one customer, they’re pretty much sunk.”

Diversification can work two ways for a business owner, Brian said. If a business offers multiple products to only a handfull of customers, owners can add new customers and, consequently, new sources of revenue.

But if a business already services hundreds of clients but only offers one product or service, then Brian suggests owners look into new, complementary products or services that will generate additional income.

But, Brian cautioned, all moves should only be made after thorough market research is conducted.

Owners should know how much it will cost to produce a potential new product and also have an idea of how much revenue that product will bring in. If a product’s operating costs exceed its potential revenue then owners should either find a way to lower the operating cost or find another product to offer, Brian said.

But offering a new product or service often requires additional capital. Tightened lending standards have made it somewhat harder for business owners to get additional financing, Brian said.

The difficulties and risks that come with diversification have caused many to simply ride out the slowdown with their current business models.

Brian said the number of business owners seeking diversification advice and services from the ASBDC has dwindled significantly over the past few months.