Table of Contents
What is Revenue Diversification?
Revenue diversification is a practice where businesses capitalize on their full potential by expanding into new markets, adding to their product catalog, and offering additional services.
For example, Uber’s main revenue driver is its rideshare service. Now, Uber Eats, Uber Freight, and localized services are massive sources of revenue for the company.
In addition to expanding market reach, revenue diversification reduces risk and helps businesses create sustained competitive advantage. Often, it isn’t the first idea that becomes the money maker. Company growth and maturity always involves trial and error.
Before Amazon became the “everything” store, it was an online bookseller. In 1998 — three years after Bezos founded the company — it began selling music and computer games. In addition to selling every product imaginable, Amazon is involved in cloud infrastructure, streaming services, robotics, and artificial intelligence.
Amazon is just one well-known example of revenue diversification — a tactic every business uses sooner or later.
- Diversified revenue base
- Diversify revenue streams
Reasons to Diversify Revenue Streams
The same way a financial advisor would see a diversified investment portfolio as a safer bet, diversified revenue streams reduce overall risk by spreading it. And they help businesses compete in multiple markets.
Reduce Dependency on One Revenue Source
The more dependent an organization is on one source of revenue, the greater trouble they’re in if something goes awry. If that one source dries up, the company loses financial stability. They’re left scrambling to replace it.
Unfortunately, customer churn is part of doing business. And things like budget realignments happen all the time, completely out of a vendor’s control. Especially in economic downturns (when sales start to decline), having fewer accounts to rely on makes the blow of each lost customer incrementally heavier.
Spread Financial Risk
If a company is doing $10 million ARR, that’s fantastic. But what if 25% of that ARR is from one enterprise account?
All it would take is one competitor to develop a product that better suited that customer’s needs, be it through better service, one critical feature, or a lower price point. If the company lost that account, it would be a $2.5 million blow.
Having large accounts is good, especially if an organization can retain them. But relying too heavily on one or two puts it in a precarious position. It’s a source of stress for the C-suite and Board, and it’s a negative signal to investors.
Even companies with well-defined markets aren’t immune to this. Innovation is taking place several times faster than it used to. In the 1970s, the average lifespan of a company on the S&P 500 was about 34 years. Now, it’s half that.
The only way a company can truly protect itself from a competitor ‘out-innovating’ it is by diversifying its streams of revenue.
Stay Competitive in Multiple Markets
Revenue diversification allows organizations to expand into new markets, embrace new technologies, and offer different services as the needs of customers change.
Netflix started out by sending DVDs through the mail. Now they’re a leader in streaming entertainment and have branched
Product innovation is a direct result of clarity, confidence, and financial stability. Revenue retention plays a huge part in this, but so does protection against market swings.
Innovation isn’t just about releasing new products. It’s about having the mental and emotional space as a company leader to pave the way forward.
Rushing to replace customers or find new ways to break even leaves little room for visionary strategies. Diversifying revenue streams allows leaders to focus on the big picture (and invest more into it), even if one branch of the business isn’t doing too hot.
In the long term, diversified sources of income better position the company for success.
Expand Market Reach
Having multiple streams of revenue in the business increases overall visibility. And it acts as a feeder system for other sectors. Reaching new customers and expanding into other markets is a lot easier with an existing base to tap into.
There are a few ways companies can accomplish this:
- Word-of-mouth — When a customer experiences one product/service, they could introduce a different product/service to someone they know. Since they’re already familiar with the company, it’s easier to trust other products from the same source.
- Cross-selling — Capitalizing on customers’ needs and expanding into a related space is another great way to spread the word about a business. If you offer web hosting services, for example, it wouldn’t be out of place to introduce website design or SEO services.
- Upselling — Upselling is both a way to offer more value and tap into markets with larger needs. Many B2B SaaS companies offer price tiers for SMBs as well as enterprise teams, for example.
Current customers have between a 60% and 70% chance of converting (compared to 5% to 20% for new ones). More than 80% of customers are loyal to at least one brand.
When a company offers more products and services, they’re enabling customer loyalty. In addition to being more sustainable for the business, that’s exactly what customers want.
Benefits of Revenue Diversification
Revenue diversification strategies aren’t always easy to implement, but they have tremendous value.
In addition to reducing dependency and risk, diversifying revenue streams can help organizations:
- Increase cash flow
- Operate at >100% net revenue retention (NRR)
- Tap into new markets or verticals
- Improve customer retention
- Reduce customer acquisition costs
- Build a stronger brand presence
- Gain competitive advantage
- Increase customer lifetime value (CLV)
- Open the door for product innovation and growth
- Appeal to investors and raise additional capital
Ways to Diversify Revenue Streams
There are countless ways to generate additional revenue. And they’ll vary by company to company. Depending on the business model, type of customers they serve, and existing revenue drivers, two direct competitors in the same industry may approach revenue diversification completely differently.
On a macro level, here are the main ways a company might diversify its income streams:
Expand Into New Markets
New market expansion is like a rite of passage for companies. Once an organization successfully brings its product to market, refines its ICP, and creates systems for selling into it, expansion is the logical next step.
When a company starts selling to bigger customers, more industries, and different countries, it opens up a world of opportunity (literally).
There are numerous ways an organization could expand into new markets:
- Launching a subsidiary
- Targeting the same types of customers in a new state, region, or country
- Targeting different customers in the same or a new area
- Acquiring a firm with additional products, technology, infrastructure, intellectual property, or customers
- Adding a new sales channel
The whole idea behind expansion is even though a business might have success selling into one market, that probably isn’t the only one out there. It might not even be the market with the highest potential for success. By gradually introducing a product to new types of customers (or more of the same ones, just in different areas), companies can generate more revenue and build out a stronger foundation.
Develop New Products, Services, and Features
When one offering is performing well, companies often invest in developing more of it. That could be anything from additional features on an existing product, to adding a completely new product line or service.
- A digital marketing agency could tack on additional services like a branding package or weekly consulting
- A popular music artist might start selling merchandise or launch a streaming service
- A software company could add customizations to its existing product
- A sunglass store might start to offer prescription lenses adapted to its existing frames
When customers are able to bundle products, services, and features into one offering (or a pick-and-choose model), it can create more value for them. And that’s what leads to higher revenue.
Revenue diversification can also help businesses deliver customers a more complete solution overall. For example, DealHub’s core product is CPQ software. Over time, we’ve added additional products to our suite, including contract lifecycle management and billing software to create a more cohesive platform. The end result is the customer can do more within the program, rather than switching between systems.
Offer Subscriptions or Tiered Pricing
The subscription business model is among the most scalable. Since customers pay on a recurring basis and the businesses already have the infrastructure to support them, they can easily add more services or remove features from existing plans.
Subscription businesses use tiered pricing in the way described above, but price tiers aren’t reserved for SaaS. Many B2C and B2B companies use tiered pricing for a one-time sale, like when you buy a phone from your carrier or purchase a certain level of quality from an ecommerce brand.
The goal of tiered pricing is to deliver value to more customers while offering the same product.
- A SaaS vendor can build an enterprise app while removing all but its core features for small businesses.
- A clothing brand can sell premium-label clothes at higher markups while offering regular customers basic quality items.
- A phone carrier will often have monthly plans with tiered data amounts, so customers can pay for what they need without feeling like they’re overspending.
It’s a win-win situation: The business is able to serve more customers and increase revenue, while the customer gets access to something that fits their budget.
Businesses form partnerships to leverage another company’s network and infrastructure. Rather than building out an entire system from scratch, organizations can join forces and incentivize customers to purchase both products at once.
Common examples of partnerships include:
- Payment gateways
- Technology integrations
- Endorsements and influencer campaigns
- Branding/marketing collaborations
Partnerships aren’t just a way for companies to increase revenue; they’re also a great way to build brand awareness. When two well-known brands team up, it’s sometimes newsworthy enough to get media attention. That can lead to organic exposure that would be difficult and costly for one company to generate independently.
People Also Ask
How do you diversify sources of revenue?
A business can diversify its revenue sources by entering markets, developing new products and features, adopting a subscription-based or tiered pricing model, and forming partnerships. When doing so, it’s important to remember that what works for one business may not work for another. Every organization needs to analyze its abilities and available resources before taking any action.
What is an example of revenue diversification?
An example of revenue diversification would be a CRM software company that also offers separate packages for subscription management and billing. By offering these separate platforms as add-ons, they support one specific type of customer to the fullest extent without isolating any of their other customers.