When planning the growth of your business, it can help to use a framework to give context to your decision making. One such framework (and by no means the only one) is the Ansoff Matrix.
Known as the father of strategic management, Igor Ansoff was a mathematician and business manager. The Ansoff Matrix was first published in the Harvard Business Review in the 1950’s but still remains as relevant today.
The Ansoff Matrix suggests that a business can select from four growth strategies, which will determine whether it markets new or existing products/services, in new or existing markets.
Some strategies are less challenging or risky than others, and in some cases the strategy is driven by certain market conditions that the business finds itself in such as increased competition, decreasing relevance, new entrants or disruptors.
The four growth strategies are:
- Existing products and services to existing customers – Ansoff calls this ‘Market Penetration’
- Existing products and services to new customers – Ansoff calls this ‘Market Development’
- New products and services to existing customers – Ansoff calls this ‘Product Development’
- New products and services to new customers – Ansoff calls this ‘Diversification’
Let’s take a closer look…
Market Penetration
This is marketing existing products or services to our existing customers. Examples are increasing the frequency existing customers buy or increasing the average transaction value by getting the customer to buy more products or services each time they buy.
The benefit of this strategy is that it is typically cheaper and easier to sell existing products and services to existing customers. The relationship is already built and it is less disruptive to business.
Market Development
This is marketing our existing products or services to a new market. If a product is doing well in one market, where else might it do well?
Examples are marketing in a new region (or country), finding new distribution channels (eg: selling via a wholesaler vs selling direct), or selling to a different demographic (eg: age group).
One thing to watch with a Market Development strategy is that looking for new business can be more costly that marketing to existing customers and can also come at the expense of the service levels being provided to existing customers.
Product Development
In the product development new products are developed and marketed to existing customers.
Companies might opt for this strategy when there is a good existing customer base or that the market for the existing product or service has either reached saturation, or could be complimented or enhanced by this new product or service.
This strategy comes with a risk of existing customers simply switching to the new product or service, and can also add significant cost to your business with additional skills and training required, or perhaps new operational processes to deliver and support the new product or service.
Diversification
This is where completely new products or services are developed and marketed to new customers.
There are two types of diversification: related and unrelated. Related diversification means that the company remains in a market or industry which is closely related to the existing offering, while unrelated means completely unrelated.
Examples might be moving from computers into refrigerators (Samsung) or offering services that are currently offered by others in the value chain – for example that may be currently outsourced to third parties.
It goes without saying that developing a new product or service for new markets is the most costly and time-consuming strategy. From R&D teams to operational processes, customer support requirements, and entirely new marketing strategies – the costs add up, and the focus can quickly be diverted away towards the new shiny direction.
Whichever strategy you choose for growth, make sure you fully understand the benefits, risks and costs of your chosen option, and be sure to maintain your focus on your existing and loyal customers.
It is, after all, much cheaper to retain an existing customer than to find a new one.
Do what you do so well that your customers will want to see it again, and bring their friends – Walt Disney
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