New Profit Centers
February 15, 2007
Q: Steve -- Several times I have read your advice to create additional profit centers if I want to grow my business. My question is - how do I know what additional profit center to create, which would likely lead to success? I don't want to make a mistake. -- Gillian
A: Great question. Sure, it sounds all well and good to hear that creating new profit centers (either a new product line or a new market or location) is smart, but often left out of the equation is just how to do that.
This is a problem a photographer acquaintance of mine has had throughout his business career. When he started out he created a nice business photographing weddings, but eventually that leveled out, so he began to look for additional ways to make money. Portraits seemed to be a logical extension, so he went down that path, and that worked too. Not long ago, still looking to expand, he decided to open a second location. That didn't work so well, and after a year, he closed that shop, losing about $20,000 in the process.
So what went wrong? "I bit off more than I could chew," he told me. "I learned a tough lesson - take small baby steps before giant leaps of faith."
So what's the secret? How do you grow your business without blowing it? Here are 5 Steps:
Step One: Look for compatibility. Whatever new profit center you choose, be sure that it complements what you are already doing. A store that sells spas and backyard furniture can logically extend into other leisure products -- pool tables, foosball tables, and so on. But the Chinese restaurant down the street that is now advertising "American Breakfasts!" seems to be missing the boat. You need to choose a new endeavor that does not confuse your customers.
Step Two: Look at line extensions. Offering new products or services to your existing repertoire, or creating a line extension, often is the best way to create additional profit centers. For example:
Tom's of Maine started out selling natural toothpaste. Obvious line extensions for this retailer have included natural floss, mouthwash, shaving cream, soap, and deodorant. But notice they are not selling razors; that would not be a "natural" (groan!) line extension for them.
Starbucks now sells music because it correctly concluded that their brand is as about an experience as much as it is about coffee.
The key to extending your line then is to correctly assess what products or services you can add that complement and expand your current offerings.
Step Three: Consider new markets. This is a more challenging and tricky animal, but very lucrative if you do it right. As opposed to adding products that enhance what you already do, you can also target a new market altogether. When I practiced law, my firm started out specializing in personal finance matters (bankruptcy, wills & trusts) before branching out to personal injury litigation. It turned out to be a very profitable move.
The risk is that you may dilute your brand, but the reward is that you in fact extend your brand and tap new markets..
Step Four: Start with baby steps. To take a lesson from my photographer friend's playbook, whatever additional profit center you offer, be sure to start small. Do not just jump in without first really testing the waters. Start small, and test, test, test. See what works. See if it even does work. See how much money you can make. See what it will cost. Once you are certain that the plan will work, then you can devote more time and money to the project.
At the law firm, I started the new practice area by sending a letter to all old clients announcing the new practice. Once I discovered that there were in fact clients to be had, and money to be made, we jumped in with advertising, training, and so forth. But it started with a simple mailing to test the waters.
Step Five: Take the plunge. Once you have decided what new profit center makes the most sense and have tested it to see if it might fly, then it is time to give it your best shot. Support your endeavor financially and with sufficient commitment of resources. Nourish it and help it grow. In time, your new profit center should become a strong tree bearing much fruit.
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Today's tip: According to Entrepreneur, the Top 10 cities for entrepreneurs in 2006 were:
Phoenix-Mesa, AZ
Charlotte-Gastonia-Rock Hill, NC-SC
Raleigh-Durham-Chapel Hill, NC
Las Vegas, NV-AZ
Austin-San Marcos, TX
Washington-Baltimore, DC-MD-VA-WV
Memphis, TN-AR-MS
Nashville, TN
Norfolk-Virginia Beach-Newport News, VA-NC
San Antonio, TX