As a startup founder, it is natural to have an ambitious vision of your venture that spans beyond a single product or even a single domain. After all, startups are about extreme upside potential. Unambitious people aren’t the kind of people who are drawn to build these kinds of businesses.
The juxtaposition of specialization versus diversification is not new and has been the center of many heated debates between economists for the past several decades. Megginson et al. (2004) conducted a study on business performance after mergers that demonstrates a positive correlation between performance and the degree of focus. At the same time, there are obvious benefits to a diverse offering like exposure to new markets and risk reduction.
That said, trying to fulfill most of your ambitions right from the early startup stages has a big downside. Diversifying too early into too many domains can result in a dilution of your efforts and a failure to get substantial results from most of your undertakings. In fact, trying to appeal to a too-broad market is one of the most common startup marketing mistakes. Here are two reasons why.
1. Your Resources Are Limited
The first problem with diversifying your efforts too early is that you have to allocate your limited resources carefully in order to succeed. Each new feature or product line costs additional time and money. This means that every new vertical you invest in deprives the main vertical of the business of these resources. This is bad because, in the early startup stages, your main offering can use all the investment of resources it can get.
The smart thing for a startup founder to do in such situations is to invest available resources in gradually increasing the product quality rather than expanding the product range.
Many founders make the mistake of investing in diversification too early mainly because they are trying to imitate the established successful brands. However, what they fail to grasp is that the established brands are at a different developmental stage.
Henry Ford famously said that his customers can have “any (car) color so long as it is black”. He realized his main competitive advantage is producing cheap cars, and rightfully chose to concentrate heavily on that while forgoing other product features (even something as basic as different colors).
Later on, when the Ford Motor Company established itself, it started offering more colors. However, doing so from early on could have been a big mistake – in the early stages of a venture, complexity is your enemy.
2. Diversifying Hinders The Establishment Of A Brand Identity
Brand image is integral to nurturing growth. Differentiating your offering from the established players in your market is one of the best ways to grow your startup brand. And the best way to differentiate yourself is to focus on what makes your brand offering unique.
By diversifying too early you might remove the focus from your point of differentiation and you may unwittingly enter into direct competition with the established brands on the market. Naturally, this is not the right move because the established players have the benefit of more resources and higher brand loyalty. In other words, they are more likely to win in a direct clash.
In order to sidestep direct competition, early stage startups are better off focusing on their unique selling proposition. This can give the business a much better chance of generating more interest and sales from the consumers in the specific niche it is targeting who are currently unsatisfied with the offering of the established brands on the market.
In sum, the question is not whether but rather when to diversify. Diversify too early and you risk diluting your limited resources as well as your uniqueness, which is your main competitive advantage. Start by focusing on solving one problem exceptionally better than anyone else on the market. Specialize first, then diversify.