12th April 2017
Things are going well. Your sales are up, your gross profit margin is strong, the cash on the balance sheet is building and the pipeline of new orders is looking healthy. The question that crops up for most business owners is ‘Where next?’.
Do you move into new markets or develop and launch a new product? Ansoff’s Growth Matrix is a useful tool in helping us to answer that question. As you can see below, it is a simple two by two matrix where we compare existing products/services and then new products/services against your existing market/customers and then potential new ones. This then gives you four potential strategies to grow your business.
1. Market Penetration
If you want to focus on developing further sales of your existing product in your current market you’ll be concentrating on Market Penetration or increasing market share.
You could achieve this through increasing your marketing spend and sales activity but realistically, you may find a cut in price is required to increase market share. The Values Discipline Model (the subject of a future blog) will help determine whether this is a good move or not.
Personally, I’m not a fan of price reductions to increase market share as competitors will often respond by dropping their prices too and it becomes a ‘race to the bottom’ in terms of pricing and margin.
The one exception to this that’s worth considering is when a lower priced entry product might get a new customer on board with you, your brand and your product eco system, enabling you to upsell higher priced and margin products to that customer.
2. Market Development
An alternative route is to branch into new markets with your existing product.
You may decide, for example, to take your product to a new geographical region or country. You could also target a new market vertical e.g. you were providing a service to accountants and now you are offering it to lawyers or veterinary practices. This is known as Market Development.
3. Product Development
A more risky, but potentially more rewarding, route is to bring a new product to your existing market. The upside of this is that your existing customers know, like and trust you and are therefore going to be predisposed to buy your new product. If you look at customers of Apple’s iPhone, they are far more likely to buy an iPad. In fact, a 2015 study by Kantar showed that og iPhone users in the US, 65% had a tablet, the majority of these were iPads.
If your new product is a hit, it is likely to have a ‘halo effect’ on the rest of your product range. The success of the iPhone has increased sales of Apple’s Macbook Air, Macbook and Macbook Pro laptops. The potential downside to this strategy is that if your new product is not well received it could damage your brand and have a detrimental impact on sales of your core product.
Developing a new product and taking it into a brand new market is diversification and this represents the most risk as you have neither experience of the market nor the product.
The Virgin Group is well known for extending the reach of the Virgin brand across new products/services and new markets. Whilst Virgin Hotels is an example of a new product to the existing market (travellers using the Virgin Atlantic Airline), Virgin Media, in contrast, is a great example of diversification and launching a new product to a new market.
It’s clear to see that as you progress through the options, from existing product to existing market, to new product to new market, the risk increases significantly. Each business will have their own approach to these risks but Ansoff’s growth matrix can be a useful tool to look at the expansion options open to you and their associated risk.
If you would like help with determining where next, then I can help you by working through a number of strategy tools with you to see which is going to be the right way forward for you and then help develop a strategic growth plan with you. If this is of interest, email me on firstname.lastname@example.org and we’ll arrange a time to have a chat about the process.