The Ansoff Matrix.

The Ansoff Matrix says there are only two things you can change in order to grow: what you sell, and who you sell it to. Cross those two and you get four routes — selling more of what you have to the customers you have (market penetration), new products to existing customers (product development), existing products to new customers (market development), and new products to new customers (diversification). They differ in risk and in cost.

Igor Ansoff published it in 1957. Owners tend to reach for the most expensive box first while the cheapest one sits untouched.

The four boxes

Market penetration — existing products, existing customers

Higher prices, higher conversion, more frequent purchase, lower churn, more of your range per customer. No new capability is required, so it is the cheapest route on the board and the one with the shortest gap between doing the work and seeing the money.

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 — which is a real risk, but a contained one, because you will find out quickly and from people who will tell you honestly.

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. Expect a pipeline that takes months rather than weeks to fill, and cost it that way.

Diversification — new products, new customers

Everything is unproven at the same time, and there is 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 the middle two 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 reach for the wrong box

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.

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

Price the four options before you choose

The figures below are illustrative arithmetic rather than a client. Take a commercial cleaning company turning over £900,000 across 60 contracts averaging £15,000 each, with net profit of £72,000. The owner wants the business to be worth more and is seriously considering launching a domestic cleaning brand.

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 — lifting 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 currently being re-bought every year at full acquisition cost. Total cost: some awkward phone calls and a proper retention process.

Box two. Adding periodic deep cleans and window cleaning for the existing 60 clients needs around £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 paying for everything.

Set out like that, box one wins clearly. Few owners ever write the four options side by side with numbers against them.

How to use 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.
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 much work you could lose and still be ahead.
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. Two boxes at once with one management team means two half-finished moves and a distracted business.

Common mistakes

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 saturation. Ask what their churn rate is, what proportion of customers buy more than one service, when prices last moved and how many enquiries fail to convert, and the answer is often that nobody has looked.

The second 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 takes more of it than 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 comparatively safe. Selling a brand new service to brand new people is box four, and it should be costed as such.

Questions to ask yourself

• 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 model sits at the centre of Business Coaching, and you can put rough numbers on a box-one move in ten minutes with the profit improvement calculator. Read Business 101 next to work out which part of the business would have to carry the growth, and Built to Last for the question of what should never change while everything else does.