What is diversification in business? Types and examples

If your business relies heavily on a single source of revenue, it may be time to consider diversification. Diversification is a growth strategy that involves expanding into new products, services or markets to reduce risk and create additional revenue streams.

By spreading your resources across different areas, diversification can help improve financial stability and make your business more resilient to market changes.

Learn more about diversification in business, including common types of diversification strategies, the benefits they offer and a real-world example of a business that diversified. 

What you’ll learn:

• Diversification in business means expanding your current products or services or moving into new markets.
• Four key strategies to diversify your business are horizontal, vertical, concentric and conglomerate diversification.
• Diversifying a business offers several benefits, such as reduced risk, increased revenue and growth opportunities and expanded market reach.
• Your business might consider diversification if growth has plateaued and you’ve been relying too heavily on one revenue source.

A diversification strategy is a plan that can help you expand your business by offering a new product or service, reaching new customers or entering different markets. The goal isn’t only to increase revenue but also to reduce risk and gain an advantage over your competitors.

For example, say the local coffee shop you frequent has historically only sold coffee. That shop may diversify its products by offering a new line of fresh pastries after partnering with the bakery down the road. Or it might open a new location on the other side of town, expanding into a new market and gaining a new customer base. These strategies can ultimately help increase revenue and support ongoing business growth.

Diversifying a business typically involves four common diversification strategies: vertical, horizontal, conglomerate and concentric. Here’s a closer look at each type:

Vertical diversification is when a business expands up or down the supply chain, also known as the production process. The goal of this diversification strategy is to help gain more control over production, costs and distribution.

Continuing with the coffee shop example, vertical diversification would be when the shop purchases a coffee farm, taking control of its suppliers. Or conversely, a coffee manufacturer opens its own retail store.

When a business uses a horizontal diversification strategy, it adds new products or services designed to offer different options to its current customers. Your business might create these new offerings based on customer feedback or market research or by identifying gaps compared to competitors.

For example, if the coffee shop expands its offerings to include pastries or smoothies, it’s using horizontal diversification.

A concentric diversification strategy involves adding new products or services that are similar—but not identical—to your core business. You can often leverage your expertise while expanding your offerings, further appealing to your current customers.

Say the coffee shop chooses to diversify by selling coffee beans or brewing equipment, like coffee grinders. These offerings are related to its core business and use the shop’s expertise in sourcing. Plus, the products target its existing coffee-loving customer base. 

Also known as unrelated diversification, this strategy involves expanding into new markets or industries that are completely unrelated to your current business. The goal of conglomerate diversification is to spread risk across different industries to help stabilize revenue and maximize returns. And it may also help manage cash flow, as the new market or product can help support the other during slower times.

An example of conglomerate diversification is if the coffee shop decided to purchase a local T-shirt company—a totally unrelated type of business.

Diversifying your business can strengthen its stability, position it for long-term success and make your company more adaptable, stronger and more competitive. Here’s a look at a few of the numerous benefits diversification can offer your business:

• Reduces risk: Diversification can help reduce risks by spreading exposure across multiple revenue sources. So if one product line or industry declines, the others can help offset the loss. 
• Creates new revenue streams: Rather than relying on one revenue stream, diversifying your business can help generate income from different areas, creating more consistent cash flow and increasing your earning potential.
• Aids in growth: Businesses that choose to diversify can grow beyond their core competencies, allowing for expansion into high-growth markets. This strategy can help businesses scale and meet greater demand more efficiently. 
• Expands market reach: New products or services can help your business reach new markets and potential customers, keeping you competitive within your industry. 
• Increases resilience: During challenging times like economic downturns or industry shifts, diversification can increase your business’s resilience—you might not feel disruptions as much with your revenue streams spread out, allowing you to pivot as needed.

For the catering and hospitality company Great Performances, complexity is part of the job. Owner Liz Neumark says that they’ve always figured out how to get things done—and that includes rapidly readjusting their offerings in 2020 during the pandemic.

The company’s “bread and butter” business—high-end catering for events—all but disappeared as restrictions were placed on large gatherings. At the same time, New York City was grappling with an enormous and immediate need for meal deliveries, including for 80,000 senior citizens who could no longer go to senior centers.

Great Performances had never gone door to door delivering meals, but it did have hundreds of waiters on staff who didn’t have work. With less than two weeks to ramp up, Neumark and her team jumped into planning mode after being awarded a contract to deliver thousands of meals to seniors.

It became critical for Great Performances to diversify its business and client base. It started working with the city and other organizations to deliver meals at scale to those in need. These adjacent markets supplemented the high-end catering business.

Great Performances quickly pivoted its 40-year business model to serve seniors, restructuring its kitchen in under two weeks to provide safe, distanced work and expanding its warehouse to create assembly lines. It adopted new logistics software to overhaul its delivery system and create a new hub-and-spoke model for neighborhood distribution.

“The big takeaway is ‘Don’t have all your eggs in one basket,’” said Neumark. “Think about different verticals. For us, it’s the city contracts and the civic and public service work. We’ll continue to grow that side of the business.”

Diversification may be right for your business depending on your goals, resources and current challenges. Every business is different, but there are some signs that diversification could make sense for your organization. It might be the right strategic move if:

• Growth has stagnated or sales have plateaued or declined.
• You’re relying too heavily on one revenue source.
• You have the expertise and experience to expand your offerings.

Here are a few frequently asked questions about diversifying a business:

Diversification can help your business grow, reduce risk and stay competitive by expanding your current offerings or markets. And the right strategy can also lead to increased revenue, improved stability and long-term growth.

If you’re ready to take the next step, getting pre-approved for a Capital One Business card—with no impact to your personal credit score—can help provide the financial stability needed to support your expansion.