Just last week, we were talking with a startup. They had aggressive plans to double sales in 2020 over the last year. And they hadn’t quite accomplished that. They had achieved an admirable 70% increase in sales; which is awesome. But the goal they set was >100% growth. So they were disappointed and thinking through what steps they should take. And then they did what so many companies do -- they asked, “Should we launch a new product to hit this goal?”
It’s the first thing most companies think of – “I need more sales, so I should launch more products.” That’s when we put our business strategy hats on and ask questions related to Ansoff’s Growth Matrix.
Question #1 – Have you fully penetrated your existing markets with your existing products yet? This is a very hard question to answer. Here are a few ways to think about it. First, what would happen if you hired more salespeople or added more resources to reach customers? One small business we worked with added two sales reps to the three they already had and doubled sales. It’s really hard to reach everyone in your target market who could be buying. So you have to stop and think about what resources could help you expand your reach.
A second part of this question involves thinking about your sales forecast in terms of number of people. Let’s say your average sale is $50. You want to reach half-a-million in sales. That means you either need 10,000 customers who buy once a year, 5,000 customers who spend $50 with you twice a year, or 2,500 customers who spend $50 with you four times a year. You get the pattern. Now you have to pick your strategy. Do you want to grow the number of customers or do you want to incentivize repeat purchases? Which is easier and more likely to happen?
The bottom line is that a startup is best served by trying to fully penetrate its existing markets with its existing products or a market penetration strategy. That takes focus, a deep understanding of customers, and strong implementation skills. It’s the least risky strategy in Ansoff’s matrix, and it’s the best for building a scalable sales and marketing plan.
Source: Ansoff (1965), Corporate Strategy; an analytic approach to business policy for growth and expansion, McGraw-Hill: New York.
If you’ve penetrated your target market as best you can, it’s time for Question #2 – Would it be easier to expand to new markets (think of a market as a set of customers) or develop new products? The classic example of market expansion is Apple in computers. First, they went after education. Then, they expanded to graphic designers. Eventually, they got a slice of a wide variety of users. Apple’s share has slowly expanded from less than 10% to almost 15% in 2020. So, are there other targets you could easily expand to if you focused your implementation efforts on them? If so, then your efforts could be described as market development.
If not, it’s time to think about new products. The least risky new products are ones you can sell to your existing customers/markets. You already have a relationship with them. That will bring your launch costs down because you are not trying to find new customers. You should know what other products they need that fit with your capabilities and your brand’s perceptual license. What’s your brand’s perceptual license? It’s basically what customers think your brand is capable of. For example, most people would expect Delta Faucet to make toilets as well as faucets. But most people wouldn’t expect Smith & Wesson to sell bicycles to police departments. And yes, Smith & Wesson actually launched a police bicycles product, and it was not successful. Let’s say you are a woman’s hair care company. It wouldn’t be too far of a stretch to add body lotions, body sprays, or other soaps. You might even be able to launch men’s hair care products that you market to your existing women customers.
The most risky approach is to develop new products for new markets. New product success rates are typically under 10%. That means that 90% of new products fail. That’s because it’s hard to figure out what new customers need and how they make their purchase decisions. You don’t have an existing relationship with them. So it takes more work to make them aware of your new product and motivate their behavior. If you want to go this route, it’s time for Question #3 – Is our idea so compelling that it’s worth the risk to diversify? If there is no way to grow in existing markets, and you can’t take your products to new markets, and your existing markets don’t need new products, then you will likely need to diversify. But first,x make sure you need to take on that risk.
Growing revenue with existing products in existing markets is hard work. You have to know your target segment very well. You have to be disciplined about designing marketing efforts that convert. You have to build accomplishable goals and see them through. But when you stay focused, you build a stronger foundation for your startup. And that stronger foundation will help your startup stay on course longer.