The Do’s and Don’ts for Adjacent Market Expansion
The vision to grow and expand a business is an inherent part of any entrepreneur’s mindset. They’re always on the lookout for more opportunities. One attractive growth strategy involves going after adjacent markets- those markets that are similar to what you already do and allow you to retain your core business values.
While growth in a new space always comes at the cost of some risk, expansion into adjacent markets is a safer bet than venturing into whole new territories. This is so because you use your existing strengths and deploy them in similar markets, creating value for current and new customers.
Many big players, including the likes of Nike, Uber, Airbnb and Pepsi have grown their brand by capitalising on adjacent markets. And as is evident from these companies, such opportunities exist in every industry.
As far as startups are concerned, expansion means lots of research, effort, brainstorming and planning. Here is a list of do’s and don’ts to keep in mind as you enter new territories.
Some Do’s
Evaluate if you are ready for expansion
The first step (and the most critical one) is to assess if you are ready for expansion. A superficial evaluation will do no good, you need to dig deep and see if you will be able to sustain such growth.
Check if you are able to hit the milestones you had planned for yourself, and that too consistently. This will give you the confidence that your business is growing at the pace you expected it to. Secondly, check your unit economics- the customer acquisition cost (CAC) and lifetime value (LTV). Are your customers bringing more money to your business than you spent on onboarding them? If yes, then great!
Thirdly, see if your team is performing as expected. It’s nearly impossible to expand without having a strong team to back you. As you enter new markets, workload and responsibilities will increase and they should be willing to take them up and ace them.
Thoroughly understand the new market
This goes without saying- unless you know a market inside out, you will face steep challenges. Just like you would have spent time understanding your current market, you will have to go into the depths of the new market.
You have to understand here that your finances and resources are coming from the market you have always been in and it will take time for revenue to flow in from your adjacent market. However, if you venture without research, those revenues might never come and you’ll end up wasting your hard-earned resources.
Take time to understand the industry environment, customers, their pain points, demographics, market trends and other factors that will affect your brand’s image and operations. Follow it up by validating the market and checking your product-market fit. There is no shortcut to success.
Evaluate your current cash flow
It is but obvious that you need good cash flows in order to break into a new market. If you feel you are just about making ends meet, despite having all other things perfectly in place, you should ideally wait before venturing into an adjacent market.
Cash flow would be needed for your core business in any case and if you put an additional burden of a new market, you might succumb under pressure. You will exhaust resources for both businesses and it will take you time to get back on track.
Once you feel that your cash flow is steady and in excess of what you need, you can take the plunge.
Some Don’ts
Don’t forget your core business
Remember that you are entering an adjacent market, the reason for which is your expertise in your core business. Don’t miss out on providing enough value to your existing customers or shift focus away from their needs.
Transitioning to a new market is bound to take up your time but one way to ensure you keep your core intact is to branch out slowly. Don’t enter multiple new markets at once because that will divide the attention even more. Take it one step at a time and stay on top of milestones for each of them.
You can also divide your team in a way that they devote enough time and resources to both your businesses so that you don’t fall behind. If you have a group of loyal customers, they can be your voice even in a new market so remember to keep their interest in mind too.
Don’t undermine the amount of competition
You’re probably pretty good at what you’re doing which is why you decided to explore an adjacent market. But in no way does your previous success guarantee continued success. Your adjacent market may be highly competitive and it may take you much longer to establish yourself.
Without carrying out a thorough competitive analysis and respecting the market share of existing players, you might end up biting off more than you can chew. If a market seems too full, you can always look out for other opportunities.
Don’t waste resources if you are uncertain of the outcome. The grass on the other side is not always green, even if it seems to be.
Don’t overestimate your core capabilities
You may be great at what you do but it does not translate into being great at everything you do. If you overestimate your capability, you might end up taking on a challenge that you can’t win. The journey towards expansion starts with an internal evaluation- what exactly are you good at and how can you put it to use in a different context?
Entry into adjacent markets will be successful if you put only those abilities to use that have always set you apart, i.e., your core capabilities. Don’t make the mistake of assuming that all your capabilities fall under your core, because that really can’t be the case.
Also, don’t assume that because you have a good share in your current market, you can overthrow small players in your adjacent one. This again links back to your core capabilities. Those small players may be much better placed in the market despite your entry because they are playing to their strengths while you are not.
Bottomline
While expansion and growth into adjacent markets is a very exciting proposition, it demands an equal amount of caution. The decision can never be a hasty one because the odds remain against you. A Bain & Company research concluded that a mere 25% of companies who entered adjacent markets were successful.
It’s good to take expansion decisions only after consulting your team, knowing the new market and connecting the dots between your existing plans and future ones. The two plans should work in tandem and not against each other.
