The CMO Survey has been tracking company growth strategies for four years. Respondents allocate 100 points among four well-known growth strategies to reflect what their companies have done over the last year and plan to do in the next year.
The four growth strategies are differentiated on two dimensions. The first dimension is whether the company is growing by deepening purchases from current customers or entering new markets (new from the standpoint of the company’s portfolio). The second dimension is whether the company is growing by trying to sell more of its current products and/or services or by offering new products and/or services. These two dimensions produce a 2×2 matrix of growth strategies (Table 1) called the Ansoff Growth Matrix.
Table 2 shows the percent of company expenditures for each strategy for the past 12 months and for the next 12 months. Most companies continue to grow through market penetration. This low-risk strategy usually yields more certain but lower returns. However, this number is expected to decrease. Companies are expected to take on more risk by increasing use of the remaining three growth strategies with an emphasis on product/service development (developing new offerings for existing markets) and diversification (targeting new markets with new offerings).
In this post, I want to talk about the product/service development strategy—developing new offerings for current markets. There are two key reasons to use this strategy. Current customer relationships offer companies the chance to learn more effectively at a lower cost. Therefore, the first reason companies should rely on a strategy of new offerings to current customers is that companies have more accurate knowledge about these customers. This means that companies are more likely to hit the sweet spot with new offerings that appeal to these customers.
A second reason is that current customers also know more about the companies they purchase from and have varying levels of loyalty to the company’s offerings. This knowledge and affection pays off in several ways for companies. The launch should be more efficient—meaning better ROI—because current customers can be convinced at a lower cost to try the new offering. The launch should also be more likely to produce revenues. Both cost-reducing and revenue-enhancing effects occur because current customers trust the company and know what quality level to expect. This means lower investments are needed to generate a response, as well as a greater probability of response from these customers. Targeting current customers can also mean that the speed of the strategy increases. Current customers take less time to jump in when company makes them a new offer. Customers jump in because it lowers their search costs when they can rely on companies they know and trust. This reason is why it is reasonable to view customer relationships as an asset. This asset is not owned by the company and you won’t find it on the balance sheet, which is why experts refer to customer relationships as a “market-based” asset. However, make no mistake, customer relationships are often a company’s most important asset.
Which companies are using a product/service development growth strategy? It seems logical that B2B companies would use this strategy based on the fact that they have fewer customers. As a result, these companies should leverage each customer for growth by offering a wider array of offerings to that customer. Indeed, B2B-product companies lead sectors on this strategy (21.6% of spending) but this is not followed by B2B-services companies, which allocated only 17.5% to this strategy. B2C-product companies are second with 19.5%, followed by B2C-services companies which allocate only 14.8%. One reason we see product companies using this strategy at a higher rate is that these companies often have histories based in innovation. While service companies do innovate, this is less likely to be in their DNA, their cultures, and their capabilities.
Are there other reasons companies do not prioritize this growth strategy? One reason may be the tendency to stick to a market penetration which is lower risk. A second reason is that companies do not spend enough time really getting to know their customers—including what adjacent needs are currently being filled by competitors. A third reason is that incumbent companies may get too comfortable in their current strategy and they fail to see opportunities in their existing customers, while hungry entrants are looking for new sources of value and meaning in customers’ lives and businesses.
How does your company grow?