Specialize or Diversify #4

The main event. This is potentially what you’ve been following along through 3 posts worth of my ramblings for. This is the pinnacle of my series on specialization and diversification. In part 1 and 2, we examined specialization within a profession and specialization of your professions. Then in part 3, I talked about diversification within a profession and in this post we will take a look at diversification of your professions.

If you have been following along since the beginning, you’ve probably picked up on the fact that I’m not really advocating any of these methods over the other ones, but rather, I am suggesting that there is a time and place for each one. Well, the time and place for large-scale diversification is pretty much when you have a whole lot of time in place. It is a very different animal than anything we’ve looked at so far, and you need to be able to ensure you have the resources available to make it work. The return on investment with large-scale diversification isn’t always linear – if you can only commit to a 50% effort, that doesn’t necessarily ensure you 50% results. Let’s go through the Why, When, and How of diversifying your professions.

Why Diversify?

Seems like an easy one, right? It really is. If you can optimize a fully diversified gold-making portfolio, you will be rolling in piles of gold. Did you catch the if there? If you can’t pull it off, you will likely end up overextended, overwhelmed, and broke. The other reason is that it can be fun. Some people prefer to oversee the “big picture” processes of a large corporation rather than the intimate details of a small business.

When am I ready for diversification?

Short answer: probably never, but you shouldn’t let that stop you from diving in if you are mostly ready. Nothing ventured, nothing gained, right? You’ve heard me say that diversification requires a significant amount of time, right? One of the main reasons why diversification can fail is because of spreading yourself too thin. In part 3, I mentioned that every market has a threshold, and you want to avoid going deeper than the market will allow. Conversely, you also need to ensure that you are deep enough into a market to have an impact.

Large-scale diversification can also be expensive, and you might end up having a lot of your funds tied up until you start seeing the big returns. So, when should you diversify? Well, if you have the time and feel you can afford the investment, take the plunge.

How to: Diversification 101

I’m going to start off by saying this: diversification is easy to do, but not so easy to do well. If you really want to start seeing big numbers, you need to change the way you look at your business and the WoW economy. In short, you need to become Wal-Mart.

Yep, Wal-Mart. If we look at their business model, there are 2 keys to Wal-Mart’s success worth looking at here. The first one is volume. Wal-Mart may not make as big a profit because of their low prices, but they simply sell more than everyone else, which means they make more money overall. Let’s say that an example item, “goop”, costs $5 to produce. Now, Gary’s Goop Boutique specializes in goop-making and they sell goop for $10. Wal-Mart sells their goop for $7. If there are 40 people looking to buy goop and 10 of them go to Gary’s, then that means the other 30 go to Wal-Mart. Gary has a great profit margin, earning $50 from those 10 sales. Wal-Mart’s profit margin is only $2, which is less than half of Gary’s, but since they have 3x as many sales, they still make more money at $60, total profit. Wal-Mart makes more money than everyone else through sheer volume.

The other thing worth noting about Wal-Mart is their overall branding. When you think about Wal-Mart, what comes to mind? For me, there are two things:

1. Lowest prices (not just low, but lowest).
2. They just seem to sell everything!

Returning to our goop example, let’s consider a couple of additional scenarios. Let’s say that all of our goop customers suddenly realize that they also need to buy some “blarp”. Now the customers that went to Gary’s are out of luck, since Gary doesn’t sell anything other than goop. Wal-Mart, however, conveniently carries blarp in addition to goop. If we assume their manufacturing and pricing structure is the same as with goop, then that is now a total of $120 profit compared to Gary’s $50.

The other question is: how long do you think Gary’s customers will continue to pay 40% more for the exact same product before they start shopping at Wal-Mart? Exactly. That makes the score: Wal-Mart – $160 profit (since they will be able to meet the new customers’ blarp needs as well) compared to Gary’s $0.

So how does this information apply in WoW? Well, diversification and volume go hand in hand, really. When you get into large-scale diversification, you really need to change the way you think about the economy and your business. You shouldn’t worry as much about the fact that you are no longer seeing 200% and 300% returns on your investments. As far as branding and recognition goes: getting your name out there on your server might put a bigger target on your back from competitors, but if you are serious about this gold-making thing, that’s going to be pretty hard to avoid anyway. The reason you want to get your name out there is the Wal-Mart factor. People might not like Wal-Mart or what it represents (the city I live in really wrestled with the decision to allow Wal-Mart to even set up shop), but people continue to shop there because of the great prices.

That pretty much covers diversification. I hope you’ve learned something along the way about why, when and how to specialize and diversify, both with and within your professions.

**Spoiler alert, incoming***

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