In this article, I will look at the issues involved with finding and selecting a niche market that will help your business to attract, convert and keep customers.
What Is A Niche Market?
A niche market is a small segment of a bigger, more general market that you can specifically target in your marketing and sales efforts. Done right, niche marketing goes even further because it completely affects the way you design and operate your business.
Defining a niche market needs me to define a market.
A market is a group of customers with specific wants and needs who decide to buy particular products and services for what those items can do for them.
By definition, the car market is the big group of people who buy cars.
That’s self evident.
But you need to go further.
The car market is the group of people who buy cars because they want or need flexible, personal transport that puts them in control of where they go and when they go.
That definition helps you to understand why people buy cars rather than use public transport as a viable substitute product or service.
Two seater sports cars is a niche within the car market for people who only need to worry about transporting themselves and possibly a passenger and want to do it in a certain style. Buying a sports car says a lot about the person and what he or she values. Even this niche can be to big which is why there is a one seater sports car.
Why You Need A Niche Market
In some ways it makes sense to think that you want to target a big market rather than a small one. It gives you more customers who could buy your product.
There are two flaws in this thinking.
- You should be more interested in the balance between demand and supply in a market. A huge market where there is already more supply than demand is going to be extremely competitive and it’s going to be difficult to make a profit. If demand is much bigger than supply, then prices and profits can be high and customers have little choice than to buy (although this may change over the long term as new competitors enter the market).
- A smaller, more focused market means that your product can match the wants and needs of the customers while a bigger, more general market has more diverse needs and you can struggle to convince possible customers to make the buying decision, which means you miss the marketing bullseye.
Effective marketing is all about getting the right marketing message or offer in front of the right customers in the right way at the right time or as often as necessary (the 4 Ms Of Marketing).
Having a niche makes it much easier to:
- get the message right
- get the choices about marketing media right
- keep putting the message and offer in front of the eyes and ears of possible customers.
I can’t emphasise enough how important it is to see marketing as a process where through a series of contacts you turn someone who has a general problem, want or need into someone who trusts you enough to give you money for the product or services you can provide. It rarely happens in one contact or touch unless the problem is urgent.
The Three Big Issues To Confront When Choosing Your Niche Market
In my article, Will Your New Business Succeed? I talked about the three big risks:
- Demand risk
- Competitive risk
- Capability risk
All three need to be considered when you are looking to choose your niche market.
Thinking about the demand risk for your niche market:
- is the demand real? Will customers pay enough money to solve the problem or to meet their wants and needs? You only need to watch a TV programme like Dragons Den to see would be entrepreneurs trying to solve a problem that few other people care about.
- is demand big enough to support your business? This is a particular problem for businesses who find that demand is restricted by location issues. Conversely the Internet has made many more niche markets viable because it can bring customers from all over the world to a business.
Competitive risk means facing up to issues like:
- Will the business be able to sustain a competitive advantage that encourages people to buy based on a low price or superior value?
- Will new suppliers enter the market or are there effective barriers to entry to stop or delay competitors?
Capability risk looks at the issue of whether the business has the capabilities and competences needed to deliver on the promises made in marketing to attract and convert customers.
Niche Marketing And Differentiation
Are niche marketing and differentiation the same concept?
No I don’t think they are but the ideas are related.
When you select a niche market, you cut down the number of competitors and customers who will be attracted to that niche.
Perhaps there are 50 competitors in the general market but only 5 in the niche. Think about moving from all hotels to 5 star luxury hotels in a small city for example.
When you’re differentiated, you create a market of one. If the customer wants the value proposition you offer, he or she has to buy from you.
Some times, selecting a niche automatically differentiate you from your competitors because no other business has chosen to target that particular niche. Going back to the hotel example, perhaps there is only one 5 star luxury hotel in a small city.
How To Find Your Niche Market
At its core, your niche market defines:
- Who your customers are:
- What they want and need to buy
Occasionally it can also involve some of the other big questions that can be used to differentiate your business – where, why, how, how many and how much.
I think it’s useful to draw a customer value map of the market you are working within or thinking about entering. This will encourage you to think about the different price points that customers buy at and the different customer value alternatives.
Many people find it difficult to think abstractly about a market and what customers want and need and persuades them to buy. It’s easier to compare two offerings at a similar price point and to see how they are similar and different. This lets you focus on the factors of differentiation.
You can do the same exercise at a different price point (it can be useful to look at economy, mid-market and premium prices) to get a better idea of the dimensions of differentiation.
Let’s think about cars again as the brands are meaningful worldwide.
A Rolls Royce and a Lamborghini may have very similar prices and they both meet the need to combine personalised transport with status but the attributes of the customer value proposition are very different and aren’t in the same niche market.
The customer value attributes of these cars are very different in some ways but similar in others. Both are expensive, offer massive prestige and status (who says “he only has a Lamborghini or Rolls Royce”?) and have big powerful engines that make the cars much faster than the average car.
The Rolls Royce emphasises comfort, space, ride quality. The Lamborghini has head-turning looks, incredible performance and astonishing road-holding and handling.
It can be worth looking at where customers have to make compromises and how readily the customers accept the problems. Anyone who can afford a Lamborghini or Rolls Royce probably doesn’t need to care about fuel consumption but perhaps the person has green views and would prefer lower emissions and more miles to the gallon. Depreciation may also be an issue if the person wants to replace the car every twelve months. these issues can help to explain how products can be differentiated within a niche market.
Once you’re clear on the main dimensions of differentiation, you can look at the different combinations that already exist in the market.
It can be useful to map two dimensions on an x-y graph so you can see how the competitors fit together. A 2×2 or 3×3 matrix can give you enough detail or you can increase the number of categories along each axis.
Think about the car market and the number of seats and price for example. To my knowledge, there is only the Briggs Mono that has one seat, so whatever price point it occupies, there is a potential niche to either side in price. In the mass market sectors, there will be a lot of cars with four and five seats around the main price points. These niches already have competition.
However, if you take one of those differentiation dimensions (e.g. number of seats) and then combine it with another (fuel economy) you may find that what looked like a busy niche has an opportunity gap.
Remember, if you’re looking at a niche market without any existing competitors, you need to consider demand risk very carefully. Perhaps there’s a good reason why this niche market is empty. If there are already competitors and the niche doesn’t subdivide nicely on another factor of differentiation, you need to think about whether you can survive competition by having low costs by producing at the minimum efficient scale.
By this stage, you should have a few ideas for the niche market you want to target in terms of the who and want (and possibly the other big questions).
At this stage your niche can have competitors because you’ll be looking at how to differentiate it within the niche later on.
The concern is whether the niche provides the opportunity for profit over the longer term. You don’t want to target a niche and find that it disappears after a couple of years.
The two main strategy models to think about are:
Many people are familiar with these two techniques but they are often done badly and therefore provide little of the long term insight that may be available about how the niche market can develop.
The SKEPTIC Model combines them together which can be useful if you’re jaded about the two individual strategy techniques.
As you look forward, you may find yourself looking at different potential trends and perhaps a few either/or situations. If these look to offer significant strategic risk, you may need to use scenario planning to develop a clearer view of the future.
Once you’re satisfied that your proposed niche has a good future, you can start looking in more detail at your strategic options. This will usually involve summarising the strengths, weaknesses, opportunities and threats in a SWOT chart.
If you’ve got an established business, you need to look at how well it can serve the chosen niche market. The value chain is a useful technique for looking at internal capabilities and resources.
If you’re starting a new business in a niche, you have the luxury of designing your business model from scratch.
Summary Of How To Choose Your Niche Market
Choosing a niche market can be easy for some people. The answer is obvious based on their past knowledge and experience or a huge gap in the market that is crying out to be filled.
Other people find it much harder. It is scary to choose a niche market or to differentiate a business within a niche.
Selecting a niche means saying Yes to some combination of customers and products/services.
More importantly it involves saying No to many more alternative combinations.
The strength and big advantage of niche marketing is that it gives the business focus, hopefully laser focus on a particular set of customers, products and services and the underlying capabilities needed to deliver customer value at a fair price. It gives the business a strong vision and makes it easier to ignore opportunities that arise outside of the vision.
How Did You Select Your Niche Market?
I’d like to collect a series of stories about how businesses decided on particular niches so if you’ve got a niche, please leave a comment.
Do You Need Help With Your Decision To Select A Niche Market?
As I said earlier, it can be a difficult decision to make the right choice of a niche market.
Other times it can seem obvious but a look at the strategic risks can show that while the niche looks attractive at the moment, it’s longer term prospects look bleak.
If you’re based in the UK, it might be a good idea for us to talk.
Paul Simister is the business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.
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