Portfolio and revenue diversification has its’ documented benefits.
When covering revenue diversification, most teams focus on removing the downside risks: revenue concentration, regulatory impacts, competition, sales cycles, etc…
BUT, there are two hidden benefits to revenue diversification that are not as well covered that I look for when evaluating a business. I will cover those topics today & tomorrow.
Hidden Benefit 1: THE NEW YORK, NEW YORK RULE
One hidden benefit for industrial technologies that serve the critical infrastructure verticals is how customer diversity grants a start-up exposure to win higher margin contracts. Here is my incredibly simple approach: the higher the margin available in the customer’s underlying product, the more investment that prospective customer can make in advancing IT/OT technologies. This approach is naturally consistent with the “value based pricing” blog I wrote about last month. The driver to this opportunity is the forcing function of lean product development and efficient distribution in the lower margin industries that subsequently creates greater cumulative profitability elsewhere.
If an industrial technology company is forced to make their unit economics work for the narrow-budgeted, low margin commodity provider (read: power, utilities) then the margin available to deliver that product to higher margin verticals should allow for materially greater profits. (competition pending!) These lower margin industries are a bootcamp to focus on delivering the highest value at the lowest price with an efficient go to market strategy. I joke that this is my Sinatra “New York New York Rule” and that ““If you can make it here you can make it anywhere” I insist that start-ups increase pricing when going to these other verticals… they deserve it!
The site, Ready Ratios, shows gross margin by industry. And these directionally line up with my broad strokes interpretation below:
Show me a technology start-up making good margin in agriculture and power and I will show you an excellent business in the other verticals.