Your business is beyond the startup stage and you’re looking to grow by expanding your product line. Here’s what you need to consider before you start.
Are You Ready for Product Expansion?
Before you launch a new product line, make sure your current product line is solid. A strong foundation is essential before you expand. To determine whether or not it is a good idea to consider adding a new product, ask yourself some questions. Are my customers satisfied with my product? Is demand for my core product growing and can I keep up with the demand? Is there a need for a new product in the market?
What’s the Big Idea?
Product expansion can take several forms, including:
- A brand new product (brand extension). Example: a carpeting manufacturer expanding into hardwood flooring.
- A variation on an existing product (line extension). Example: a carpeting manufacturer launching a “green” carpet line.
- An upgrade to an existing product. Often used in the tech industry, this involves creating a newer version of a product with new features and eventually phasing out the old one.
Often, ideas for product expansion arise naturally. For instance, if numerous customers request a product you don’t currently offer, that’s a good indicator you should think about adding it to your lineup. Or, you may want to diversify your product range to keep up with what your competitors sell.
You can also get product expansion ideas by researching the latest industry trends, paying attention to what customers and prospects are talking about, and holding focus groups or conducting customer surveys.
Outdoor Living Today leveraged both market research and working with their customers to expand and improve their product lines. Customer feedback helped the backyard kit manufacturer to focus on making kit assembly easier as well as developing new product lines. Collaboration with customers, explains OLT founder Greg Bailey, helps maximize sales with his existing customer base. Collaboration builds both his product line and these valuable relationships.
“We have good relationships, and we try to enhance that. I feel like we’re seeing some great results from this approach. We’re going to continue to make our company more valuable to them and increase the business,” he says.
Market research also helped Bailey and OLT innovate entirely new product categories in response to the growing “tiny house” movement.
“We plan to make kind of like a little cottage that you can assemble at your site. You can get it out there, you can assemble it, you don’t need to bring in a backhoe or all the big heavy equipment. This is going to be something that is portable when it comes in. fairly easy to ship it, but once you put it up, it’s there and structurally sound, and it looks great. That’s our next project that we’re working on. We’re really excited about that,” says Bailey.
Market research and customer collaboration are a powerful combination. Market research, such as OLT’s efforts, helps you assess the size of the market for the product as well as existing competitors. Thorough research can answer key questions like “how much market share are you able to capture?” Upfront collaboration with customers ensures that when your product is ready, the sales will be there as well.
Calculating Costs of Your New Product
Developing and launching a new product can be costly. You must keep producing your original product line without a decline in quality or service, while simultaneously developing, testing, producing and marketing a second. You also need to commit time and resources to the new product, which may require hiring more workers or paying your existing employees overtime.
If your new product is closely related to your original product, or has the same customer base, the task is easier and the costs will be lower. If not, it will be more difficult — and more expensive — to introduce the new product line successfully.
For example, suppose you use recycled plastic to manufacture carpet padding sold to carpet retailers and installers. Using the same recycled plastic to make shoes sold to department stores is a completely different ballgame. Even though you’re using the same source material, you’re targeting a new customer base and will need to use different distribution channels.
To determine if a new product is worth the investment:
- Estimate how much it will cost to develop the new product. This includes R&D, intellectual property protection, materials, manufacturing and production, sales and marketing, and HR.
- Estimate sales projections for the new product for year one, year three and year five. Include a best case, worst-case and mid-range sales scenario to ensure you aren’t being overly optimistic.
- Calculate the projected net profit for the new product in year one, year three and year five, using all three of your sales projections.
How long will it take to break even on the new product?
Plan for Financing Your New Product
Once the estimates above are completed, it’s time to consider financing options for your new product line. Creating a detailed cash flow forecast that includes both existing products and the new product line will help determine how much money you’ll need and when you’ll need it. Use this information to plan ahead so you always have access to working capital to keep moving forward with your new product launch.
If you can’t finance the new product internally or with your existing line of credit, consider accelerating invoices to fund R&D with your own cash flow. This way, you can grow your product line and your business without growing your debt.
Keep Your Business Growing With New Products
If done right, product expansion cannot only boost your company’s sales, but also enhance your relationships with your existing customers. By providing a wider range of products to suit their needs, you’ll become a more valuable supplier in the long term.