When you consider the demise of companies like Blockbuster, Radio Shack and Zellers, it’s clear that too many CEOs have blinders on when it comes to diversifying their sources of revenue.
Maybe it’s a fear of upsetting the board with far fetched ideas; possibly it’s a result of too many filters in the business that serve to minimize the significance of the risks. Whatever the case, the hidden risks associated with insufficient revenue diversification is enough to stop any company dead in it’s tracks.
Does most of your revenue come from a single customer, a single product or a single market?
A single source of revenue might not seem like a big deal, particularly if the relationship is sound and the revenue is consistent, but in my experience the hidden risks are virtually always more significant then you might expect.
[Tweet “Put another way it’s not the risks you know but the risks you don’t know that are the greatest obstacle.”]
During a recent discussion with a client we began to dissect some of the hidden costs that the loss of one of their predominant customers would have on their business. The list was extensive, however the top three risks are something that apply to any business, namely:
- The risk of being focused on customer retention over customer attraction.
- The breadth of the loss of revenue is not completely understood or quantified.
- The costs associated with the inability to achieve economies of scale are unclear.
So, what can you do to reduce the risks associated with a single dominant source of revenue?
One of the most successful approaches I’ve helped my clients incorporate is through the incorporation of revenue life cycle planning in the formulation of your strategy.
Rather than just focusing on ways to shift the organization’s attention and investment in order to reduce risk, consider instead understanding the life cycle of the predominant revenue sources in order to understand specifically how long the source is likely to sustain.
- What is a reasonable life cycle of the revenue source?
- What initiatives may influence the life cycle?
- What are the competitive pressures and obstacles that may influence the life cycle?
- What customer and market shifts may influence the revenue source life cycle?
- What are the potential hidden risks that may influence the life cycle?
If Blockbuster, Zellers or RadioShack had included life cycle planning in their strategy, it’s likely the longevity of their existing revenue sources would have been much clearer, allowing for contingency planning.
It’s okay to have a predominant source of revenue, but by considering a possible life cycle of the revenue source you reduce the risk of meeting a fate that serves no one.
© Shawn Casemore 2015. All rights reserved.