As a CFO, this is a question I get asked a lot.

And as an owner, this is one that I’ve had to answer for myself quite a few times.

So this week I’ll be diving into when you should launch that new product—and just as importantly—when you shouldn’t.

Let’s get into it.

The Right Reasons to Branch Out

You should launch a new product if:

1. Your customers are already asking for it.

2. You can offer it at a higher margin than existing offerings.

3. The add-on extends LTV.

Your customers are already asking for it.

Whether you’re losing business to a competitor offering a more comprehensive solution or this is something you get asked about more than a few times per month, you need to take note.

But before you proceed, there are still a few things to consider.

First, how prepared are you and your team to offer that new product or service? If you need to grow headcount or upskill significantly to meet demand, can you do so profitably?

From there, you need to determine the approximate demand for your new product. How many of your existing customers would take you up on it, and how much would they be willing to pay? Often you can get away with charging a slight convenience premium here.

But if you’re unable to prepare your team to meet the new demand profitably—or insufficient demand exists to justify the investment—you’re still better off sticking to your bread and butter and referring out adjacent offerings for a commission.

You can offer it at a higher margin than existing offerings.

Even if a new offering doesn’t go on to make up a significant portion of your overall portfolio, it’s still worth adding if the margin is high enough.

A great example of this principle at work is landscaping firms that also offer pest control services.

While there’s an initial cost to upskilling their staff and acquiring the raw materials, the service itself is rather cheap to provide. It’s also not particularly labor intensive and property owners are willing to pay a high price for it.

Even if just a few existing customers were to sign up for the additional service, the ROI would still be strong over time.

The add-on extends LTV.

Sometimes it makes sense to launch a companion product that’s stickier than what you currently have to offer. It can either be down- or up-market from your core offering, but the additional stickiness is the point. Alternatively, you can increase stickiness simply by offering a more complete solution.

I’ve seen clients in the insurance space do this rather successfully by offering different types of coverage to the same group of customers. The reason this works so well is that the core product is the same but packaged differently. Their customers also stick around longer because they appreciate the convenience of not having to manage multiple providers.

The benefit of doing so is twofold.

First, you’ll have to spend less time recruiting new clients to outrun inevitable churn. Second, you’ll have more opportunities to upsell existing clients as their willingness to pay expands.

When to Stay Focused

You need to stay focused if:

1. You’re just looking to deploy excess cash.

2. This move is strictly to copy one of your competitors.

3. You’re looking to offset weakness in another area of the business.

You’re just looking to deploy excess cash.

When there’s excess cash in the business, the urge to deploy it immediately can be particularly strong. However, launching a new product isn’t always the most efficient use of that excess capital.

Instead, you should list all of your options for the extra funds. Whether you sit on them for now, acquire a competitor, grow your team, or expand your offerings, you should do so only after you’ve articulated the opportunity cost and your probability of success for each option in detail.

This move is strictly to copy one of your competitors.

If you wouldn’t consider expanding your portfolio independently of what a competitor is doing, then you should at least pause.

This is for several reasons.

First, just because your competitor is making a move doesn’t mean it’s the right decision for your business. Second, you’re unlikely to know the context behind a competitor’s moves in order to fully judge their strategic value in the market.

You’re looking to offset weakness in another area of the business.

When there’s a known weakness in the business, you need to address it head-on. Attempting to subsidize it by diverting resources elsewhere is not the answer.

Instead, you need to weigh your options for phasing it out, reorganizing the team, or attracting a different customer base. Whatever you do, make sure you’ve solved the problem systemically before moving on.

Putting It All Together

Here are your top takeaways from this week’s post.

1. You should offer a new product or service if your customers are already asking for it and you can meet the new demand profitably. Expanding your offerings also makes sense when you can do so at a higher margin than your core products and/or this new offering increases customer lifetime value.

2. But launching a new product isn’t always the right move.

3. You should stay focused on your existing portfolio if you can’t prove that a new offering is the best use of excess cash, you’re tempted to make the move just to follow a competitor’s lead, or you’re trying to subsidize a weak area of the business by branching out.

4. If there’s a known weakness in your business, you need to address it fully before diverting time and resources elsewhere.

Hungry for More?

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2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor