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.

Talking to yourself

At some point in every product launch, you get the sneaking suspicion that you’re talking to yourself. You’re not wrong. It’s a known “brain barrier”—the tendency to hear what you want, and it can stand between you and your company’s growth. In a classic McKinsey report, Hidden Flaws in Strategy, Charles Roxburgh outlines the 8 human biases that drive smart leaders to create flawed strategies.

1. Overconfidence
2. Mental Accounting
3. Status Quo bias
4. Anchoring
5. Sunk Cost effect
6. Herding instinct
7. Misestimating Future Hedonic States
8. False Consensus





















These play out in economics and marketing. In this post, I show how and where we see them stand in the way of sound marketing strategy. Most often, it’s False Consensus that leads us astray—the tendency to talk to yourself, rather than the customer and the market. So how do you combat it with real data?

The bias of false consensus
We hear what we want to, from customers, stakeholders, and prospects, because of our tendencies to:

• Confirm bias—seek out the facts that support our beliefs
• Selective recall
• Biased evaluation—quick acceptance of evidence that supports our belief, and rigorous evaluation and rejection of contradiction
• Groupthink, the pressure to agree in teams

In our work, we see product launches, branding and market positioning stall out or go off track due to false consensus. When you’re excited about a new technology or product, it’s hard to get out of your own head and avoid assumptions about what customers want.

Practical ways to get out of your own head and test your marketing hypothesis
This bias causes expensive product development and marketing missteps. In teams where you’re all excited about the project and its potential, it’s easy to talk to yourself.

So how do you get out of your own head and into that of the customer? There are ways even the smallest company can afford to test their theories:

1. Product previews. Early in product development, PLP Digital Systems previews the software to key customers gathered at an industry conference. Result? Early interest, and focus on the features that matter. Optimax uses a similar model in their annual customer summit. Why guess when you can ask?

2. Developer kits. Instead of presuming how customers will use their technology, the forward-thinking guys at New Scale Technologies supported their customers R&D efforts throughout the sale and support of their piezoelectric motor kit.

3. 1:1 customer interviews. In a 20-minute phone conversation, we'll learn where your customer sees value from your company and your product, business and tech trends in their business that impact what they'll expect from you, and why they buy. To avoid hearing what we want to hear, we always close with "what would you like me to know that I didn't ask?" Do a set of 8-10 interviews in each segment for validity.

4. Dual-purpose marketing and data collection. Digital ads like Google AdWords can give you real-time data on demand by industry, application, or geography. In helping an optics company create a new channel in Europe, we used an ad targeting Spain to test impressions and clicks against similar-sized countries where our customer already had a presence.

Any other test techniques you’ve tried? What surprised you?