Concentric diversification is a strategy used by companies to increase market share by introducing new products that attract existing and new customers. The new products may be related to the existing product line, and the goal is to create a coordinated look or variation on a product line to appeal to new markets. This strategy can also be applied to investment portfolio diversification.
Concentric diversification is one of several different diversification strategies used by companies to increase their attractiveness to consumers. With this particular approach, the business will try to increase market share by introducing a range of new products that are likely to not only attract the attention of existing customers but also attract new customers. Sometimes called convergent diversification, the goal is to motivate existing customers to continue buying the company’s older products while also choosing to buy the newer products. At the same time, the effort is also attracting new customers unrelated to the older products, based on the appeal of the recently launched product line.
With concentric diversification, it’s not unusual for newer products to have some relationship to the existing product line. For example, a company that has established a steady clientele for its paper plates may choose to add other product lines that can be used in conjunction with the plates. This can include a line of disposable cups, napkins, and even color-coordinated plastic cutlery and disposable tablecloths. The idea is to entice customers who already buy the plates to buy the other products to use at the same time. This approach can also appeal to new customers who want to create a coordinated look when enjoying a casual dining experience, such as an outdoor picnic.
In some cases, concentric diversification will involve opening up new markets by creating a variation on a product line that has already established a loyal clientele in a particular market sector. Using this approach, a company that currently offers commercial cleaning products used by professional cleaning services may choose to launch a similar line of products that appeals to households. In some cases, the branding of the new line may be reminiscent of the older commercial line, making it possible for people who already know and trust the older products to try the new line at home. Assuming that the new line provides an acceptable level of satisfaction, the manufacturer will expand its customer base into a new market sector, effectively increasing its profit margin and making the concentric diversification effort successful.
The general principle of concentric diversification can be easily translated to other settings as well. When it comes to investment portfolio diversification, an investor may choose to include a series or group of shares issued by companies that operate in similar markets, such as buying shares in a telephone company and also a conference call bureau. The approach allows the investor to enjoy similar returns from both investments, as there are some consumers who would use both types of telecommunications services.
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