What Is Market Diversification?

Market diversification is a process that is often used by companies to improve their positions and ensure a steady flow of revenue. The sources of that revenue may have to do with actions to secure investments that are varied enough to ensure returns in most economic situations, as well as the influx of sales revenue that is generated in more than one type of consumer market. With market diversification of any type, the ultimate goal is to ensure the business has money coming in that will sustain the operation and also pave the way for future growth.

In terms of products, marketing diversification typically involves finding ways to successfully launch product lines in more than one type of consumer market. At times, the range of products offered by a company may be connected in some manner while still serving a different need of the consumer. For example, a teleconference provider may focus primarily on providing audio and web conferencing solutions, but may also arrange to provide fax services to customers at competitive rates. This may not only serve the purpose of strengthening ties with customers who use both faxing and conferencing in their daily business models, but also open the door for the company to secure customers who are more interested in faxing than in any type of conference service.

Market diversification may also involve a business diversification process that involves creating and marketing products in totally unrelated markets. This means that a company may have an established presence in the clothing industry, but decide to also create a line of home appliances as a means of engaging in product diversification. The end result could be that both product lines perform well, adding to the revenue of the business. Should economic conditions lead to one of those two lines beginning to generate less revenue, there is a chance that the other line will see an upswing in revenue generation, a situation that would help to keep the company relatively stable throughout the current economic crisis.

As it relates to the stock portfolios owned by businesses, market diversification is often one of the strategies used in allocating resources to those portfolios. For example, a company owner may determine to allocate half of the portfolio to stock issues. Within that half, the owner may choose to include certain percentages of stocks associated with computer technology, retail, renewable energy, and manufacturing. The idea behind this type of market diversification is to create a mix of stocks that are likely to hold up well in any type of economy, with gains on some holdings offsetting losses sustained by others and making it possible for the portfolio to still post an increase from one accounting period to the next.