Diversification... or Distraction?

Mark shares a recent conversation with a client fixated on "diversifying" her business, which to her meant expanding her coaching services from 1-on-1 to group coaching. Diversification is one of those concepts that sounds wise (of course you should diversify!) and is a bedrock concept of investing. However, as Jesse points out, what most people think of as diversifying is really just expanding -- expanding product and service offerings, introducing new price points. The expansion still serves the same market. True diversification is decoupled entirely from the product or service, like using excess earnings to buy Treasury bills. The value of T-bills is independent from the performance of the business.

 

There is nothing wrong with expansion! It's natural as busineses grow and accumulate more institutional knowledge to seek out new opportunities to leverage that knowledge. But it's not diversification. That prompts Mark and Jesse to ask the question, why? Why do you want to diversify? What's the thought behind the thought? The answer can reveal the true nature of the problem -- maybe the business owner is worried about some risk exposure in the business and is trying to sidestep solving that problem (or perceiving the problem to be bigger than it really is), or perhaps the owner is simply bored and looking for a new problem to solve.

 

Whatever the answer, before you take steps to diversify your business, understand the why behind the motivation so you don't end up merely distracting yourself from the core business.

 

 

Acquired Podcast on Costco:

https://www.acquired.fm/episodes/costco

 

 

Mark Butler, Virtual CFO

The Money School: https://moneyschool.works

https://markbutler.com

https://letsdothebooks.com

 

YNAB

https://www.youneedabudget.com