Horizontal diversification involves creating products that may not be directly related to current products, but are attractive to the existing customer base. It is marketed as an added benefit and can increase profits, but does not expand the customer base. Companies also diversify in other ways.
Horizontal diversification is one of several types of diversification strategies that companies and private investors can use to increase the return on their efforts. As far as a business is concerned, this type of diversification strategy involves creating products that may not be directly related to the current products offered to consumers, but are likely to continue to be attractive to the company’s existing customer base. the company. This approach is somewhat different from other diversification methods, as the goal is not to attract new customers in different markets, but rather to offer a broader range of goods and services to a loyal customer base.
An example of horizontal diversification can be seen with a local retailer that has an established reputation for selling quality pieces of jewelry. As a means of increasing business, the retailer may decide to carry a line of scents in the store. This approach creates opportunities to sell perfumes, colognes and aftershaves to customers who already frequent the store looking for quality jewelry for personal use or as gifts. When the strategy works, a customer who comes in to select a necklace as a birthday present may also notice the scent line and choose to purchase a bottle of perfume along with the necklace, allowing the store owner to get a return on both. product lines. .
In many cases, a company that is engaged in horizontal diversification will conduct an in-depth assessment of its current clientele and determine what other types of products they may be willing to purchase while continuing to support the current product line. Factors such as location, gender, and income level will often be taken into account when identifying new and different products to offer alongside the traditional product line. Typically, this approach is marketed to consumers as an added benefit offered by a trusted company that allows them to satisfy more than one need by purchasing a broader range of the company’s products. Assuming that the new products meet customer demands for quality and price, there is a very good chance that the approach will be successful and that the company will enjoy higher profits.
While the concept of diversifying horizontally offers a number of benefits for both the business and its clientele, there is also a potential downside to consider. Since the goal is to sell new products to your existing customer base, this strategy does nothing to increase your reach to that customer base. This means that any factor that negatively affects the buying power of those customers will also have a negative impact on the number of sales generated. For this reason, many companies will not rely solely on diversifying horizontally, but will also seek to diversify in ways that appeal to consumers associated with different age, gender, and economic demographics.
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