Investment advisers and wealth management experts will often urge their clients to diversify their portfolios; the basis for this recommendation comes from the efficient portfolio theory of minimum risk and maximum return through a careful selection of assets. To a great extent, portfolio diversification boils down to not putting all your eggs in one basket, and a similar rationale can be applied to business operations, particularly as it relates to income streams.
Business income diversification is similar to a strategy that virtually all personal financial planners mention to their clients: multiple sources of income present a greater advantage than the typical 97/3 ratio that many Americans follow. This allocation ratio refers to 97 percent of income coming from a full-time job and 3 percent from investments. A better allocation would be as follows:
- 50 percent from a full-time job.
- 30 percent from a part-time online business venture.
- 15 percent from rental income.
- 5 percent from investments.
Granted, the allocation above would require considerable individual effort, but it is something certainly worth achieving, particularly when planning for a comfortable retirement. As for business owners, income diversification can open the door to more than just greater profits; it can also bring about consistency, stability and a more defined path towards growth.
The 21st Century Constant Revenue Trend
Tech giants such as Apple and Microsoft have become quite skilled at transforming their business models into multiple income streams, and this is something that they have accomplished in recent decades. In the case of Microsoft, switching to a Software-as-a-Service (SaaS) model has turned the company into a monthly revenue behemoth. As for Apple, the money is coming from multiple sources such as extended warranties for their iPhone and iPad catalogs, visits to the Apple Store and the Genius Bar, mobile apps, iCloud subscriptions, digital content, and more.
What Apple and Microsoft have created can be described as financial ecosystems supported by diverse income streams. It should be noted that these ecosystems were built on the respective pillars of each company; for example, Microsoft took its popular Office productivity software to the cloud and started charging subscriptions while Apple has extracted all the juice it can from its mobile devices. Moreover, both companies have also made strategic acquisitions to diversify their income stream; Apple purchased the Beats streaming service to boost its digital music platform while Microsoft purchased the LinkedIn business social network to bring in advertising revenue.
Companies in the tech sector are hardly alone in the constant revenue trend of the 21st century. According to a recent article published in Insights, the Stanford Business School online news outlet, the subscription business model has been growing on an annual basis of 100 percent in recent years. The New York Times, Blue Apron, Netflix, and even Fender Guitars are now deriving most of their income from subscriptions. Even charities are getting in on the action by setting up monthly giving program options for donors and supporters; this is in addition to their traditional social enterprise and fundraising models.
Getting Creative With Diversification
You would normally think that a business such as Chipotle, the wildly successful fast food chain, would choose expansion as its ideal business model; in 2014, however, the company produced a Netflix comedy to promote its Pizza Locale and ShopHouse brands. A couple of years later, the Chipotle online store was doing brisk business selling themed merchandise.
Business owners who think outside of the box are the most likely to succeed when they choose to diversify. Related products are the most direct path to additional income streams, but many companies are turning to services as well. In developing countries such as Costa Rica, for example, internet cafe providers are known to purchase an enterprise copier/printer machine that turns their business into a print shop.
Integrated solutions are income streams inspired by the question “what else can we do?” A good example is Fender Guitars, which recently launched its Fender Play online learning system; it is only natural for one of the most legendary guitar brands to offer lessons based on the musical preferences of its customers.
In the end, diversifying income streams could be the best strategy implemented by business owners, but this should not be thought of as firing an easy silver bullet. Generating additional revenue can become a task in and of itself, and it is not always guaranteed to work the first time around. Chipotle, for example, pulled its ShopHouse brand in 2017 and is now regretting the move.