Your Product Mix: Diversification vs. Niche
When talking about our retirement investments, it’s commonly recommended not to put all your eggs in one basket. But does this philosophy hold true when structuring your business and product offerings? What are the pros and cons of having a diverse range of products, services, and markets versus carving out a specialty niche for yourself, where you tailor products and services to appeal to a target market?
As part of the business coaching we do at iPoint, we ask our dealers to describe the products and services they offer and which of those are the most and least profitable. While the responses vary, we see a common split between dealers that serve many markets and have a very diverse line of products and services, and dealers that have a more focused approach — specifically targeting a niche market where they excel. The niche dealers generally consider themselves high-end and focus their marketing resources on acquiring new business solely within their chosen niche. The diverse camp opts to cover all their bases by doing whatever work comes their way.
“The benefit of having a diverse product line is to smooth out the cash flow. The quick, smaller jobs fill in the gaps between the large lump sum revenue generated by construction-based projects,” said Aaron Koker of Kansas Audio and Video. “The challenge when offering many different services like security and satellite in addition to the traditional AV products is that you have to manage a lot more small parts inventory and sporadic scheduling. In addition, the margin on smaller jobs is usually a lot lower, so you have to be really efficient to make it work.”
The secret sauce is to look not just at the bottom line, but at the components that make up your bottom line. When you have your metrics on the different components of your business, you can evaluate what makes you money and what costs you money. When new dealers start using iPoint, we often ask them what their margins have been on the different product categories they sell, and the vast majority have no idea because they lacked the tools or processes to track the data. Without valid data, it is difficult to make informed decisions about what products and services to add or remove.
A good business management program will have a way to see your initial margin on a specific product category, but you must also take into account the additional costs including inventory overhead, installation efficiency, failure rate, training time, additional tooling, design and engineering, as well as any losses caused by disruptions to your current production cycle.
Wynne Walker with Symbio Lighting and Control explained the process they went through when evaluating a new product category for their high-end residential AV company. “After a local rep suggested we start selling and installing outdoor landscape lighting fixtures, we decided to run the numbers and see if it made sense for us,” Walker said. “Although the product had big margin potential, it required us to make an initial investment of over $50,000 in tools, vehicles, and inventory.”
In addition to the up-front investment, there can often be a learning curve you have to plan for. What will it take to get your people properly trained to sell and install the new products?
When asked about the challenges of adding outdoor lighting, Walker responded: “Our techs didn’t like the outdoor manual labor of burying cables, and it wasn’t a good use of their time. We learned that it would be more efficient to outsource the manual labor of trenching. In addition, inventory is a major process, and we have to stock many parts to deal with a lot of small changes.”
In general, it’s easy to not account for the full impact that small changes can have on a business’s operations. It can often take months of retraining and inefficiency to recoup the cost of simply changing the manufacturer of an existing product line, let alone adding a completely new category.
When evaluating your company, if you find that having too many product offerings is lowering your overall profitability, then you should analyze the value of that product to your business. Here are a few questions you should ask when evaluating the validity of a product category.
• Does it add value to another more profitable category?
• Does an entry-level service like a quick flat-screen install lead to a larger distributed audio and video job?
• Does it provide revenue if your larger revenue channels decline due to market conditions outside of your control? For example, if you are a high-end new construction integrator and the building market has another recession, can you shift focus to shades, lighting, or security, which may be more resilient in a recession? If you shift all the energy from the category in question to another more profitable category, how will this affect your current production?
At the end of the day, there is not a single correct answer. Depending on the needs of your business, the decision to brand yourself as a niche, high-end company may be just as valid as being a one-stop shop for everything. The important takeaway is that you start thinking about your business as a system of many interworking parts and not just one big entity. By breaking down the components of your business and measuring the impact each one has individually as well as part of the whole, you can make strategic decisions that will ultimately empower you to confidently grow your company and your profits.