Starting a business is always an exciting adventure. But after some time, entrepreneurs will begin to wonder, “What’s next?”. The Ansoff Matrix is an easy framework to figure out growth strategies, even though it was created in the 1950s! With the expansion of ecommerce, are these strategies still valid today? Let’s find out!
If you attended business school, you probably learned about a framework called the Ansoff Matrix. If you haven’t, it is pretty easy to understand. Named after Igor Ansoff, this tool lets you easily visualize the main ways a business can grow. It features four main strategies across two axes: markets and products:
The company can focus on existing or new products (vertical axis) and existing or new markets (horizontal axis). Products are what the company offers, and markets are either a target market/demographic (automobile market, camping market, etc.) or a geographical area. The more the company moves toward something new, the riskier the strategic move is. The result of the Ansoff Matrix is four quadrants: market penetration, product development, market development, and diversification.
Now, the Ansoff Matrix was developed in 1957. While it still makes sense today, its concept was created well before the internet and ecommerce were a thing. Our friend Igor Ansoff could not predict that fifty years later, people would use sophisticated networks of computers to have clothes, car parts, or chicken nuggets delivered directly to their houses. Ecommerce changed the game and created new opportunities for entrepreneurs, especially when it comes to market development. That is why I want to go over this model and see how it applies to growth strategies for the ecommerce entrepreneur.
Let’s review these four strategies, discuss the main tactics associated with each one, and their pros and cons. Before doing so, I would like to briefly mention how the risks involved with growing a business have changed. In the original model, it wasn’t clear whether market or product development was the riskiest strategy. As we will see in this article, ecommerce greatly decreases the risk of expanding to new markets. That is why I found it interesting to reconsider the model when it comes to risks.
Market Penetration
The idea here is to sell more of an existing product to an existing market. This is the least risky strategy. If you are an entrepreneur, you hopefully have experience with what you sell; you know your customers, suppliers, and industry well, and you know the current trends. While “sell more” does not sound like a very innovative strategy, the tactics used can make a big difference.
Advertise more
Advertising more will result in more people seeing the company’s offer and increased sales. Building product awareness through advertising is a quick way to get customers to know about your product and offer (as opposed to brand awareness, which, in my opinion, should only be used in very specific cases – see my previous post here). Advertising is a great tool that can make a huge difference in sales. However, while it can generate many extra revenues, advertising isn’t free and can destroy a business’s profit margins if not done right. Popular ways of advertising, such as influencer marketing, sound great on paper, but companies often struggle to measure ROI and lose advertising dollars that would be better spent in another way.
There are many ways to advertise, and each business can find a way to do so that fits its goals, budget, and tolerance to risk. It is the least risky tactic because it is easy to scale up and down based on results. Ecommerce made it even easier to adjust advertising budgets and offer new channels and ways to target specific customers.
Decrease prices
We all like a good deal and lower prices. Depending on how sensitive customers are to price changes (it matters especially on “commodities” markets—see my post on this topic here), decreasing prices can have a significant impact on sales. It often involves addressing the demographic already buying the product, but it also has the potential to attract the more cost-sensitive customers, who would not buy the product at its current price. As a result, the customer demographic can change a little after a large decrease in price.
In some cases, the lower profit margin after a price decrease can be offset and compensated by a significant increase in sales volumes. The problem is that starting a price war is rarely a good idea and often causes the whole industry’s profit margins to collapse. That is why this strategy works best when the company finds a good way to decrease costs. It can be done by altering the value proposition and/or improving the company’s efficiency – which brings me to my next point. The main risks here are to start a price war and see a long-term profitability decrease or to see no positive results, with no way to realistically revert to the previous higher prices without upsetting customers.
Improve operational efficiency
Improving the company’s operation is a way to improve its margins by decreasing costs and prices. If a company plans to sell more of an existing product, it can take advantage of economies of scale, for example, negotiating volume discounts with its supplier on a larger order or reorganizing its teams. In the online space, shipping costs can have a huge impact on profitability. Companies can find ways to decrease that cost or pass it on to the customer.
Buy a competitor
Buying a competitor offering similar products is another way to immediately increase sales. It can be risky and involve some change, both in the product sold and the demographics reached. However, it can be very rewarding if done right. Though, I will not go into details as this is a very complex tactic that would require its own series of articles.
Product Development
A business can decide to develop a new product to address its current market. For example, a company that sells vitamins can choose to add a fish oil supplement to its product range. There are a few ways to expand a product range, and I will discuss the three most common tactics used. These do not differ much from an online business and carry the same risks, with the exception of dropshipping.
Resell another company’s product
A quick and easy way to add more products to a company’s assortment is to resell existing products. This is what tens of thousands of businesses are doing, from Walmart to many local small businesses. An online sports goods store would buy tennis equipment from a distributor and resell it in their store. It is maybe the least risky way to do it: the product already exists, and it is easy to estimate its popularity. Sometimes, it involves a small initial investment since many distributors have low MOQs.
However, there are three main problems with this tactic. The first is profitability. Businesses selling other companies’ products have to deal with licensing fees or middlemen who cut into their profit margins. Second, there might be a lot of competition if the product is widely available. Finally, this isn’t always a great thing to do in terms of branding; customers will remember the product they bought more than who sold it. Ecommerce made dropshipping a lot easier, which even became a meme at one point. Dropshipping is a variation of this tactic, and although it is less risky, it has its own problems (for common goods sold directly to customers, that is a combination of profitability, competition, branding, logistics, time spent on customer service, and the bad reputation of dropshipping). If you look past the “get-rich-quick” model sold by social media gurus, dropshipping can be an interesting way to expand a business and/or test new products.
Sell a white label product
Selling a white labeled product can be an easy way to expand a product range without missing out on branding. I used white labeling a lot when I was getting started with my nutritional supplement business. I had my core offer made of two custom products, and I expanded my product line with a few white labeled products that fit well under my brand. This increased my total order value numbers and gave me more credibility on the market.
The investment required is typically lower than for custom-made products (MOQs for privately labeled products are usually reasonable, and there are few development costs), which makes it far less risky than developing a custom product. The drawback here is that margins can be thinner than they would be on a custom-made product. White labeled products are often widely available on the market, and competition can be tough.
Develop a new product
Devising a custom-made product is an exciting adventure. Innovative companies can develop new products that have the potential to generate high customer demand. If everything goes well and things are planned accordingly, the company will enjoy a less competitive environment and will be able to achieve good margins on its new product. Rewards can be great, but it is also the riskiest strategy. Developing a new product is time-consuming and costly, and the initial investment can be high. If the product is innovative enough, there is no comparison possible to estimate the customer demand. But again, this has the potential to generate the most money if everything goes well.
Forward/backward integration
I chose to put forward and backward integration here, as the goals are often to create synergies with the existing offer to target similar markets. As a reminder, forward integration is when the company gains control of what is ahead in the value chain; for example, an online store that would start its own delivery company. Backward integration is when the company gains control of what is behind in the supply chain; for instance, the same online store could start manufacturing some of the items sold. The advantage here is to cut the middleman to improve profitability and create synergies with the rest of the value chain. It involves huge development costs and can create inefficiencies due to increased complexity.
Market Development
Ecommerce changed the game when it comes to market development. It became a lot simpler for businesses to expand geographically, and online marketplaces make it easy to address new sales channels. It still requires some work, and there are risks involved, but businesses no longer need to secure physical retail space or a local workforce.
Address new local sales channels
This is one of the things I like the most about ecommerce: entrepreneurs are now able to effortlessly reach people all over the country, twenty-four hours a day! Building an online store has never been easier, especially with platforms like Shopify. A huge part of online sales is made on marketplaces such as Amazon or Walmart Marketplace. Selling on those is easy, and they even have fulfillment programs. It is now possible to sell directly on social media, which can be helpful in reaching more customers, and the risks and investments are very low compared to the potential returns. Finally, online businesses can still have their product on shelves in retail stores by selling directly to these stores. It requires B2B sales work but can be a substantial additional source of revenue.
Expand internationally
Expanding internationally is more difficult than locally due to customs, tariffs, and other regulations. The difficulty, investment, and efforts required depend on the targeted countries. However, marketplaces and 3PL companies make it easier to do so. For example, Amazon Europe Marketplace makes it easier for European businesses to sell across Europe.
The business side can be a bit trickier. Failure to estimate the local competition, regulations, and customer behavior can result in a disaster. Even the largest companies, like Walmart, are not immune to international expansion failure. When Walmart tried to open stores in Germany in the late eighties, they did not realize the American model would not work in Germany. The labor costs in Germany are higher, and the laws are more restrictive (for example, it is illegal to not pay sick leave and vacation time in Germany, and workers can’t work too many hours per week). This worked against the low-cost business model of Walmart. Local customers did not like some of Walmart’s practices, like the “greeters” at the entrance or the employees bagging the groceries for the customers (European stores let the customers bag their groceries. I was extremely confused the first time I shopped at a US supermarket). Finally, Walmart underestimated the competition from local low-cost grocery stores. This resulted in a major failure for the American giant.
Reach new demographics
Market expansion does not only mean location. Businesses can try to sell their products to new demographic targets. For example, a business manufacturing joint health supplements for humans can expand its product range by addressing the pet supplement market. It may require a new brand, market research, and marketing efforts, but the product itself is very similar. This is riskier as it requires more development, investment, and research. In the example above, Walmart failed to realize the American and German demographic had different behaviors regarding grocery shopping.
Diversification
Diversification is the riskiest strategy and involves developing new products to address new markets/demographics. The diversification can be more or less related to what the company is already doing by exploiting synergies.
Related diversification
Related diversification happens when the company exploits synergies to create new products. For example, if an artist sells prints of their unique art, they can decide to create exclusive t-shirt designs to sell to a different demographic. They exploit the same resource, their artistic talent, to diversify their business and sell different products to different customers.
Unrelated diversification
Unrelated diversification happens when the company invests its time and resources into a completely different product/market. This is the riskiest strategy, as it involves entering a whole new business.
Conclusion
The Ansoff Matrix is still relevant today, in my opinion, and it does a great job of explaining the best ways to expand a business. While still relevant for online businesses, ecommerce made some strategies a lot easier to carry out and less chancy. Some marketers like to use a nine-box matrix, with “modified” products and an “expanded market”. I chose to focus on the traditional four-box matrix as I did not want to over-complexify things. As explained in my book, I see ecommerce as a way to do business, and many core business principles apply to ecommerce, including the Ansoff Matrix.
