Horizontal diversification can be seen with a local retailer that has an established reputation for selling quality jewelry and decides to add a scent line to its inventory.
Horizontal diversification is one of several different types of diversification strategies that can be used by companies and private investors alike to increase the return on their efforts. As a business, 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 still appeal to the company’s existing customer base. This approach is slightly different from other diversification methods in that the focus is not on attracting new customers in different markets, but on offering a wider range of products 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 jewelry. As a way to increase business, the retailer may decide to bring a line of scents into the store. This approach creates opportunities for selling perfumes, colognes and aftershave to customers who already come to the store looking for quality jewelry for personal use or as a gift. When the strategy works, a customer who comes in to select a necklace as a birthday gift might also notice the scent line and choose to buy a bottle of perfume along with the necklace, allowing the store owner to earn a return from both lines. of products .
In many cases, a company that is dedicated to 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. Often, factors such as location, gender and income level will be taken into account when identifying new and different products to be offered alongside the traditional product line. Typically, this approach is marketed to consumers as an added benefit offered by a trusted company that allows those consumers to meet more than one need by purchasing a wider range of the company’s products. Assuming that the new products meet the quality and price demands of the clientele, there is a high chance that the approach will be successful and the company will make greater profits.
While the concept of horizontal diversification offers a number of benefits to the company and its clientele, there is also a potential downside to consider. As the focus is on selling new products to the existing customer base, this strategy does nothing to increase the scope of that customer base. This means that any factors that adversely affect the purchasing power of these customers will also have a negative impact on the value of sales generated. For this reason, many companies will not only rely on horizontal diversification, but will also seek to diversify in order to attract consumers associated with different ages, genders and economic demographics.