Several times a year, all business owners should strategically consider any ways to diversify the sources of revenues as well as decrease or spread out the concentration of sales across multiple customers, industries, products. The reason this is important is to mitigate your risks caused by concentrations and maximize your profit potential.
Diversification: To the extent it is possible based on the type of business you own, I am suggesting a strategy to spread your revenues across both vertical markets and geographical areas. Obviously this isn’t possible for retail type businesses or businesses that can reasonably serve one vertical market or geographical location. However, many businesses do have the flexibility to spread out their customer base, industry served, and geographic market area.
An good example might be a temporary staffing company that handles staffing to the light industrial market in market like
A company can also diversify its sources of revenues by adding additional locations in markets not currently served. If you are considering adding an additional location, consider the type of customers you will be serving in the new area. Consider the differences between your current geographic sales area and the new one. If possible, compliment the mix of types of industries served or customers served.
Concentration of Revenues: One normally considers individual customers when they think of concentration of revenue, but concentration by industry is also important. Last year I worked with a manufacturer of bonded fibers. The best example of something made from bonded fibers is the trunk liner in an automobile. In my customer’s case, they had the capacity to create many types of products for customers in addition to trunk liners, headliners, and other components to automobile manufacturing. This customer had a 60% concentration of revenue that came from the auto manufacturing industry. They recognized that they would be very susceptible to downturns in auto sales, so they adopted a strategy to greatly increase their sales of craft batting material and specialized bonded fibers used in airplanes and upholstered items like chairs and mattresses.
In addition to serving other industries to spread out the concentration of sales to the auto industry, this client also begin selling hard to the auto makers that were more financially sound, like
Since there are as many strategies as there are companies, you may need to think “out of the box” when deciding on a strategy to spread out revenues by customer, geographical areas served, and products sold.
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