Smart, growing companies are always on the lookout for ways to increase their revenues. Sometimes that means finding new revenue streams. There are times when doing that works really well. When a company finds an additional product or service, they can offer clients—especially when that product or service leverages their core competency—it can really be a boon to business.
For instance, Midas started out in 1956 focused exclusively on selling and repairing mufflers for cars. They then expanded to include shock absorbers, brakes, oil changes, and a host of other services. And they did that because customers coming in for muffler repairs had other automotive needs that could be handled at the same time. Those were revenue streams that didn’t exist for Midas in the beginning.
For years, enterprise software companies often made as much (or more) money selling maintenance, upgrades, and training as they did for selling their software. In some cases, the software was almost a “loss leader”—paving the way for lucrative maintenance contracts.
We’ve seen this kind of expansion play out quite a bit in recent years. Commercial printers have offered mailing services because much of what they print ends up in the mail stream. In a similar vein, photocopy services have offered shipping services (note the merger of FedEx and Kinkos). In each case, someone looked at the needs of their clients and customers (that related to what the business was already doing) and figured out a way to generate a new revenue stream.
There is, however, another side to increasing revenue streams—and it can have a bit of a darker hue. Taking on new areas of expertise—particularly if they are outside of your specific core competencies—brings added responsibility and risk. Here’s a small-scale example of what I’m talking about.
A friend needed to have his house painted. After checking with several reputable companies, he went with a painter he had used before. They weren’t the cheapest bid, but my friend had been very happy with the quality of the work. As the bid was being finalized, my friend mentioned that he also needed to replace his gutters because they often overflowed in the winter with snow melt and caused a serious safety hazard on his front steps. He wanted to replace the gutters before painting began.
The painting contractor had been looking for ways to increase revenues—and had found what seemed to be a logical fit: offering gutters. A lot of clients, it seemed, needed gutter work at the same time that they needed house painting. The painter—while an expert painter—really didn’t know that much about gutters, so he subcontracted that work out to someone else and took a percentage of the profits. It was a great deal—except for one thing.
The salesman selling the services knew painting—not gutter services. He sold my friend a solution that he claimed would solve his ice problem (in addition to selling a paint job). Things looked great all summer and into the fall. Then winter came along.
To make a long story short, the new-and-improved gutters made the ice problem much worse than it had ever been. Not only that, but they caused water to leak down the side of the house—which also made the paint job look bad in places.
When my friend tried to get the problem fixed, the painter pointed his finger at the gutter guy. The gutter guy wasn’t eager to make (free) repairs, because he wouldn’t have sold this solution in the first place—knowing that the outcome wouldn’t be acceptable.
My point in all of this is not about who was right or wrong. But in an attempt to add a new revenue stream, the painter had gotten himself into something that was beyond his ability to deal with. He sold a service he wasn’t prepared to stand behind. He had a great reputation as a painter—but there wasn’t a chance that my friend would now endorse him.
Adding new revenue streams can really help your business to grow. But beware of the “dark” side of doing that. Make sure you know what you’re getting into and that you’re prepared for the additional responsibilities that come with additional revenues.
Oh, yes. There’s one more thing: “May the Force be with you!”
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