Mix it up: diversification is good ‘insurance’
“Don’t put all your eggs in one basket” is a common saying which can be applied to almost all areas of our lives, particularly when it comes to business. But what exactly does “not putting all your eggs in one basket” mean for business in rural Australia? If nothing else, this pandemic has shown us how important diversifying income could be for a business’s - or a town’s - survival.
Diversifying income streams
A diverse income business model, in simple terms, is a way of generating different sources of income which are independent of each other. This works in much the same way diversifying portfolio investments is important to hedge risk of any one stock or industry falling.
And studies agree. Peter Frumkin and Elizabeth K. Keating write:
"Business and non-profit researchers have long argued that by establishing and maintaining multiple streams of funding… organizations are able to avoid excessive dependence on any single revenue source, stabilize their financial positions, and thereby reduce the risk of financial crises."
(Diversification Reconsidered: The Risks and Rewards of Revenue Concentration, 2011)
When business is booming, it is easy to become complacent. Businesses can fall into the trap of relying on that fixed income stream, neglecting fresh opportunities which may be a little left of field or ‘out of the box’. And this may be particularly true in regional areas where...
Advantages and Challenges
In their journal article, Frumkin and Keating write about the advantages and disadvantages of diversifying income stream for business.
“Against the dominant trend in the literature that focuses on the risks of revenue concentration, we find that nonprofit organisations that have highly concentrated and specialised forms of revenue actually experience some significant benefits, in the form of lower administrative and fund-raising expenses. However, these savings are associated with greater exposure to swings in an organisation's financial position.”
The different income streams don’t have to be huge or self-sustaining on their own, they just have to be independent of each other. The best reason to cultivate additional revenue streams, apart from the ones mentioned in the study above, is so that a business is not completely dependent on a single source if or when it falters.
The source may not disappear completely, but if a business is tied to one single revenue stream and that source shrinks, then it’s more likely the business will not struggle as significantly, as they would have if completely reliant on it as a sole source of income. Of course, as mentioned in the study above, that means that an organisation is more prone to the ups and downs of several different markets and industries, not just a single source. Those additional sources of income might not completely replace what was lost, but they may help cushion the fall, until other areas can be developed, or other clients or suppliers secured.
History is littered with examples of companies who weren’t able to pivot fast enough as their industry changed. Even huge companies such as Kodak or Blockbuster, didn’t have enough diversity or depth of income streams (or, some would argue, enough foresight) to adapt and rely on other sources of income as the industry around them rapidly changed. In contrast to companies such as Apple who have diversified from personal computers and Nintendo, who originally sold cards, or Play Doh who made a wall cleaner to remove coal stains.
Another reason why diversifying is important to business survival is that diversifying fuels growth. By tapping into different revenue streams, along with being able to ride out times when the market cools, diverse income streams provide opportunities to meet more of your customers’ needs, in providing a holistic, deeper level of service. If these revenues are even loosely related, customers may end up utilising the other areas of the business as well, or referring others.
Stay Relevant and Complementary
Challenges can be averted by keeping focus on the business’s primary goal - which is generally the wellbeing of their customers. Thinking about other revenue streams in terms of this goal, can be seen as an offer of an additional suite of services or filling a niche that satisfies your existing customer base by providing additional products or alternative options.
As one of the advantages identified by Frumpkin and Keating, successful diversification through complementary sources can help you expand without spending more or hiring extra staff. By having staff work across different areas within the one business, it becomes easier to maintain the skills and standards required. In effect, it means that all personnel are “working off the same sheet.”
In contrast to “not putting all your eggs in one basket” , other conventional wisdom warns against “spreading yourself too thin” or becoming a “jack of all trades.”
Despite the clear benefits of having multiple – and diverse – revenue streams, small businesses owners often focus on a particular service or product out of concerns about neglecting their core business.
The solution lies in having a range of revenue streams that remain relevant and complementary to your core customer base. Apple again is the perfect example, where customers who purchase an iPhone can download music from iTunes and apps from the App Store. Or a mortgage company who can also help their clients secure personal or car loans.
The pros seem to vastly outweigh the cons for most businesses - diversifying income streams can somewhat insure your organisation against the unexpected, bring in new customers through complementary services while maintaining staff levels and deliver a higher level of service to existing customers.
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