Diversifying revenue streams

The easiest sale is to your existing customer. But easy money doesn't make for sustainable companies. Market leaders like ITT Exelis and Melles Griot know this: they're restructuring and entering new markets to diversify revenue streams by industry and by customer. Why? Simultaneous dips in defense and semiconductor markets. For many companies, too diversification comes late. Real market traction takes 12-18 months, and can come as a surprise if your mix is out of whack.

Here in Rochester, countless small companies closed due to their reliance on Kodak and Xerox. When I took over this company, one customer accounted for 80% of our revenue. [We speak from experience here.]

I work with companies in the laser market with too big a concentration, looking to grow biotech and consumer goods to decrease dependency on other markets.

What’s the right mix?
My rule of thumb: 20% per customer, 33% per industry.

Your CFO may agree: CPAs audit for revenue streams over 10%, but would voice real concern over 20%, says John Rizzo, Managing Partner of Rizzo Digiacomo, CPAs.

How to diversify
If you're too dependent, but limited in resources to pursue new industries, some suggestions:

• Identify and stick to core competencies. Vertical integration doesn't decrease risk. 
• Decide between geographic, industry or product expansion. "Decide" comes from the Latin for "to kill"--choosing which you will NOT pursue this year is one of the hardest and most necessary keys to success. 
• Create a customer persona in the industry you excel at--look for parallels in product demands, demographics, buying behaviors. You're looking to reach similar customers with demand for similar capabilities, driving your product in a direction that increases your competitive edge in both markets.
• Test demand early and often. One customer, in looking at geographic expansion, started google ads in a country they were considering as a target. They were able to compare impressions and clicks against countries where they had a strong customer base. Talk to dealer sales reps in the new territory or market: what do they hear from their customers? 
• Position your product in the new market: Same product, new customer will mean new "care-abouts."
• Look for leverage in your marketing plan. Change up your activities for better cross-over. Design a single tradeshow booth with changeable signage per market/application, web landing pages per market, etc.

Whatever you do, make sure you look at your customer and industry mix as part of every review of financial health. Take deliberate action to achieve and maintain the mix that's right for your business.