The Ansoff Matrix

Igor Ansoff published this in 1957 and nobody has improved on it since, because there is nothing to improve. There are only two things you can change to grow: what you sell, and who you sell it to. Cross those two and you get four routes, and they are not equally risky.

The reason it earns its place in a coaching library is not the four boxes. It is that owners almost always reach for the most expensive box first, while the cheapest one is sitting untouched in front of them.

The four boxes

Market penetration. Existing products, existing customers. More of the same, sold better. Higher prices, higher conversion, more frequent purchase, lower churn, more of your range per customer. No new capability is required, which is exactly why it is the cheapest.

Product development. New products, existing customers. You already have their trust and their contact details, so the cost of getting a hearing is close to zero. The risk sits entirely in whether you can build and deliver the new thing profitably.

Market development. Existing products, new customers. A new town, a new sector, a new size of client, a new channel. The offer is proven. What is unproven is whether the new buyer wants it, believes you, and buys the way your current customers do.

Diversification. New products, new customers. Everything is unproven at the same time, and you have no existing relationship to carry you through the mistakes. This is where owners go when they are bored, and it is where a lot of good businesses have been damaged.

Which of boxes two and three is riskier depends on your business. If your edge is technical, product development is nearer home. If your edge is relationships and delivery, market development is. Both are meaningfully riskier than box one.

Why owners get this wrong

Box one is unglamorous. It involves raising prices, which means conversations. It involves chasing lapsed customers, which means admitting they lapsed. It involves selling the second service to a client who only buys the first, which means somebody has to ask. None of it makes for an interesting story at a networking event.

Box four is a story. A new brand, a new market, an idea that arrived on holiday. It also consumes cash, management attention and credibility all at once, and it does it while box one is still sitting there with money in it.

A worked example

The figures are illustrative arithmetic, not a client. Take a commercial cleaning company turning over £900,000 across 60 contracts, averaging £15,000 each. Net profit is £72,000. The owner wants the business to be worth more and is seriously considering launching a domestic cleaning brand.

Price the four options properly before deciding.

Box one. A 4 per cent price increase across the book is £36,000 of additional revenue with essentially no additional cost, so almost all of it lands in net profit. That single move would lift net profit by half. Separately, the business loses about eight contracts a year and replaces them. Cutting that to four preserves roughly £60,000 of revenue that is currently being re-bought every year at full acquisition cost. Total cost of pursuing box one: some awkward phone calls and a proper retention process.

Box two. Adding periodic deep cleans and window cleaning to the existing 60 clients needs about £12,000 of equipment and training. If a third of the book takes it at £2,400 a year, that is £48,000 of new revenue from customers who already trust you, with no acquisition cost.

Box three. Opening in a town 35 miles away means a supervisor at £34,000, a second van, and marketing. Realistically £45,000 goes out before the first contract is signed, and the pipeline takes six to nine months to fill.

Box four. A domestic brand means a new name, a new website, a different pricing model, a different staffing model, different insurance and a customer who buys in a completely different way. Every assumption is untested at once, and the owner's attention leaves the £900,000 business that is currently paying for everything.

Set out like that, the decision is not close. The interesting part is that most owners in this position have never actually written the four options down side by side with numbers against them. They have simply felt that the existing market is tapped out. It rarely is. It is usually just under-worked.

How to apply it this week

1. Draw the four boxes and write your real options into them. Not categories. Named, specific options with a rough cost against each. Most owners find they have seven ideas and six of them are in box four.
2. Measure your share of wallet. Of everything a good customer buys in your category, how much do they buy from you? If you do not know, ask five of them this week. The answer is usually the size of box one.
3. Model a price move. Take 3 to 5 per cent across the book, work out the extra profit, then work out how many customers you could lose and still be ahead. That number is almost always larger than owners expect.
4. Count your lapsed customers. Everyone who bought in the last three years and has not bought in the last twelve months. That list is box one, already qualified, and nobody has rung it.
5. Put a cap on box four. If you are going to diversify, decide in advance how much money and how many of your own hours you will spend before you stop. Write the number down while you are still unexcited.
6. Pick one box for the next two quarters. One. Two boxes at once with one management team means two half-finished moves and a distracted business.

The mistake most owners make

Declaring box one exhausted without ever measuring it. Ask an owner why they are not growing in their existing market and you get an answer about the market being saturated. Ask what their churn rate is, what proportion of customers buy more than one service, when prices last moved and how many enquiries they fail to convert, and the answer is often that nobody has looked.

The second mistake is running three boxes at once with one team and one owner. Attention is the scarce resource in a small business, not ideas, and diversification quietly takes about four times as much of it as anything else on the list.

The third is confusing a new product with a new customer. Selling an additional service to your existing book is box two and it is comparatively safe. Selling a brand new service to brand new people is box four wearing box two's badge, and it should be costed as such.

The questions to sit with

• Out of 10, how thoroughly have you worked box one before deciding your existing market is finished?
• What proportion of your customers buy only one thing from you, and when did anyone last ask them why?
• Which box does your most exciting current idea sit in, and how much of your own time will it take next quarter?
• If you were forbidden from adding a single new product or new market for twelve months, how would you grow?

This is core to the Strategy & Destination work. Strategy is largely a matter of deciding which box you are in this year, then having the discipline to stay out of the other three until it is finished.