6 Critical Things You Need To Consider Before Product Diversification

Like most business decisions, product diversification should not be executed before carefully considering all aspects of the move.

Diversification is a business strategy that involves offering more than one product or service. When done correctly, product diversification can be an effective way to help reduce risk and increase your company’s long-term profitability.

However, the process comes with some risks, especially when companies do not consider the potential consequences of diversifying their offerings before implementation.

If you’re thinking about including a new product or service category into your business, it is essential to first understand how the move will impact your organization before making the leap.

Here are six critical things you need to consider before product diversification.

Know your core competencies

Before you even consider diversifying your product line, it’s critical to understand your core competencies. This is the set of skills and resources that your brand is uniquely positioned to provide to customers.

The first thing you need to do when considering product diversification is to ask yourself, “How does this new product or service fit into our core competencies?” If the answer is “not at all,” then it doesn’t make sense to pursue that product diversification option.

When you diversify your product or service offerings too broadly, you run the risk of becoming unfocused and diluting your core competencies. This can hurt your business by making you less competitive and decreasing your brand’s appeal to customers. [Click to tweet]

Leverage your competitive advantage

Another thing to consider when diversifying your product line is your competitive advantage.

Whether you are diversifying in the same niche like Apple did, adding new products like MP3 players and phones to the computer they were known for, or breaking out into an entirely different product line all together, like Amazon that went from being an online book retailer to becoming an e-commerce giant, you must know your unique strengths and have figured out a practical way to employ them in the product line you are introducing.

People need to know what your company can do better than any of its competitors in its current market to consistently choose your products and services over other available options. [Tweet that].

Estimate the ROI of each potential product

Before you start diversifying your product offerings, you need to figure out how much each new product or service will cost and how much profit they will bring into the business. This will help you determine whether or not the product diversification is worthwhile.

Additionally, depending on the type of product or service diversification you are considering, you may need to hire new employees or invest in new equipment and software, resulting in extra overhead for you.

Thus, you need to make sure the returns are worth the investment. If you’re adding a product that only brings in a limited inflow monthly, or inflow that does not justify the investment, then it probably isn’t worth it.

Be clear on the costs associated with product diversification activities

One other important thing to consider when diversifying your product line is the costs associated with the activities that go into implementing new products or services.

Before you start creating new products, you need to understand the costs associated with designing, manufacturing, marketing, and distributing those products. Doing so allows you to accurately estimate how much the product diversification will cost your company.

Product diversification doesn’t come without costs which is why it’s important to understand these costs before diving into product expansion.

This will make you better prepared to handle the costs associated with product diversification. It will also help you determine whether or not product diversification is financially feasible for your company.

Ensure that the Timing is Right to Diversify Your Product Line

Timing is also an important factor to consider before diversifying your product offerings.You need to accurately access your organization’s readiness to move into a new product category.

The assessment should answer questions like, How strong is your current product line? Is your company financially prepared to take on a new product category?

For successful product diversification, the timing has to be right.
For a successful product diversification,the timing has to be right.

Are there other factors that may make it more challenging to move into a new product category? Is there a ready market for the new product or service? Is the diversification ahead of its time or behind it?

While there are no hard and fast rules for determining the perfect time to diversify your product offerings, answering these questions will provide the clarity you need.

Be clear on your end goal to succeed in product diversification

Before you start adding new products or services to your product line, make sure you understand the end goal. What is the main result you want to see from the product diversification?

Once you know what the end goal of product diversification is, you can start drilling down into the smaller goals associated with it.

For example, if adding a new product to your line is meant to increase sales, then your smaller goals might be to determine the best price point and gain an appropriate amount of market share.

Every goal you have in business is related to the broader goal. It’s important to have a clear picture of what you want to achieve with product diversification before you start adding new products or services to your lineup.

Finally, having carefully considered all the factors discussed above, it’s important to know how to ascertain if your product diversification strategy is successful.

Factors like the overall financial impact your product diversification strategy has on your organization, the way the diversification is impacting your customer base and how you have been able to successfully manage the new products and services that have been added to your product line are some key criteria to gauge the success of your product diversification strategy.


Product diversification is an important business strategy that can help reduce risk and increase your company’s long-term profitability.

However, it’s important to understand the potential consequences of diversifying your offerings before implementing a new strategy.

This will enable you to fully maximize the benefits that your business can enjoy by diversifying its products. You can also be sure that by making informed decisions you will inadvertently avoid common pitfalls.

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