Software vendors should diversify, but don't rush

There are many benefits that single-focus software companies can reap by diversifying into other areas, but any expansion plans should be considered carefully, analysts say. Areas that need to be factored in include whether new products are logical extensions to the core product and whether customers are better served by the additions to the vendor's portfolio.

Martin Schneider, research manager of software at 451 Research, pointed out that the assumption that software vendors are successful because they stick with one product is an "oversimplified premise".

Salesforce.com, for example, may be best known for their cloud-based salesforce automation tool, but it also offers products in customer support, analytics, social collaboration, and platform-as-a-service (PaaS), he said.

Yanna Dharmasthira, research director at Gartner, gave a different perspective, saying that having a singular focus could be good for the software company if the product is an emerging technology and the market is not mature. This means there still lots of room for growth and not many competitors have entered the industry yet, she explained.

Timing, company maturity critical
The analyst did say that diversification, in general, is a good strategy to grow customers and expand to different markets. For the software industry specifically, she said this strategy will help vendors grow their businesses further should the new offerings complement existing ones.

For instance, an enterprise resource planning (ERP) vendor may observe its customers demanding front-end products such as customer relationship management (CRM) and expanding into this area would be a good move to make, Dharmasthira noted.

Schneider agreed, saying that the vendor needs to see if the new area it is planning to enter is a "natural extension" to its core business.

Using Salesforce.com as an example again, he said: "Assuming Salesforce.com tried to break into the network security market next, it'd probably be less successful than if it tried the marketing and customer support software markets."

Companies should thus avoid jumping into "hot" areas via acquisitions or introducing new products as these moves could backfire, the research manager warned.

He added that the company's maturity lifecycle would also determine when diversification would be a wise move. Startups, for one, would obviously stick to their core competencies since they have limited resources and market reach to move beyond their local markets.

On the other hand, established blue chip companies have strong enough sales clout with their large installed bases to consider adding adjacent products to its portfolio, Schneider said.

Skilled manpower, channel compatibility with the targeted new market, and number of existing competitors already in the industry are other factors that need to be considered before branching out, Dharmasthira pointed out.

Be guided by customers' needs
Ultimately, software companies need to know that the ability to address customer needs is paramount, and should be placed above any plans for diversification, said Robert McNeill, research vice president of cloud services and IT outsourcing at HfS Research. Enterprise software vendors, in particular, should take note as meeting buyers' needs is core to their businesses, he added.

McNeill said that a software company's growth has less to do with diversification or its business model, and more to do with how much it understands buyers' challenges and whether its product is easy to use, delivered economically, and priced affordably.

"A company has more likelihood of success if all these are addressed positively and better than [their competitors]," he noted.

Schneider added that companies must have a logical strategy that offers additional value to their existing and potential customer bases. This means having a "firm narrative" to communicate to customers about the value proposition of their new and existing offerings.

"The more the new products intermingle with existing lines, the easier it is for sales and marketing and engineering to quickly and efficiently ramp up the [sales pitch] around the business benefits of the new feature sets," he said.