All businesses, big or small, must make a fundamental strategic decision. Will they pursue a general market for their product or services? Or will they pursue a niche market?
Small businesses are increasingly finding their early profitability in niche markets. These markets are easier to dominate. And they allow for narrowly targeted advertising and marketing. It's no accident that you hear the saying, "The riches are in the niches."
This tutorial explores the pros and cons of both generalist and niche approaches when starting or developing a business. And it identifies the factors that should lead you to choose one over the other.
Author: Mike Armour
Should You Compete in a Niche Market?
Or a General Market?
Your Most Basic Strategic Decision
The old adage "you can't be all things to all people" holds especially true in business. From the outset a startup faces critical choices about what type of customer it best serves.
This then boils down to a fundamental question:
- Will you develop products and services to serve a general market, where you will face more competition?
- Or will you specialize in a niche market which you can more easily dominate?
You cannot ignore this choice, because it is a primary shaping force in your business plan. Your choice will impact how you brand yourself, how you market yourself, where you will advertise, how you will price your products or services, and the type of workers you hire, among other things.
Who Is Your Customer?
The temptation for any enthusiastic new business owner is to believe that everyone will like, want, or need what his or her business offers.
The truth is, even if people need a given product or service, it does not follow that they will want it. And even if they want it, they may not prefer your particular offering.
Thus, the issue becomes, "What type of customer or client will I seek to serve primarily?" The more specific and detailed your answer to that question, the more you are positioning yourself as a niche business.
For sake of illustration, let's imagine that you envision your product as something that would be appealing to all parents and grandparents. That's a fairly general market. But if your product is targeted at parents who are homeschooling seven to ten-year olds, that's a rather narrow market, a niche.
Some products, by their very nature, lend themselves to a niche. Age-specific children's toys are a good example. If your product or service falls into a category like this, the generalist or niche issue is already settled for you.
The challenge is with products or services that could be used by people across a broad spectrum of businesses, industries, personal life-stages, or neighborhoods. Here the choice to serve a general market or a niche market must be purposeful and intentional.
The Niche Market Advantage
Why, then, would any business that has potential appeal to a broad market choose to narrow its focus to a more limited range of potential customers?
The answer is found in another old adage, "The riches are in the niches." It is commonly easier to become a profitable player in a niche market (assuming that it's not already saturated) than it is to be profitable in a general market. On the other hand, because the customer pool is so much larger in a general market, if you can succeed there, your long-term revenue is potentially much higher.
It is commonly easier to be profitable in a niche market than in a general market.
What makes niche markets attractive to a business startup is that niches allow you to focus your energy, marketing capital, and attention more tightly. You are using a rifle approach, not a shotgun approach. Everything you do is highly targeted. As a result, in a niche market you can more quickly establish yourself as the "go-to" business in the minds of likely customers.
Turning Niches into Riches
Several years ago a friend of mine decided to hang up his management career and become a professional speaker. As a business field, professional speaking is heavily crowded and highly competitive. To be successful, most speakers must position themselves in a segment of the market where they can limit the number of competitors.
The primary topic that appealed to this young man was customer service. In and of itself, speaking on "customer service" is a generalist offering. All kinds of businesses need to improve their service to customers.
It's not surprising, therefore, that hundreds of speakers advertise keynotes and workshops on customer service. So how was my friend to break into this saturated market and set himself apart?
The one industry that he knew well was health care. And he was particularly knowledgeable of hospitals. He had been an assistant administrator in a regional hospital for years. And in those years he had observed both the best and the worst of customer care in a hospital setting.
So rather than billing himself as a specialist in customer care, he narrowed his focus and marketed himself as an authority on customer care in hospitals.
Within three years he was billing over a million dollars in fees and standalone training programs which he sold to hospitals. That's a level of income which few professional speakers ever attain. His presentations were so practical and down-to-earth that word of him spread rapidly through the entire health care industry. Hospitals all over the country were soon calling to ask him to speak to their staffs.
Now as it turns out, he was a very funny and creative presenter, so he could be entertaining on almost any subject. But his ability to be entertaining was an additive to his success, not the essence of it. His success stemmed from his mastery of the needs in a niche market and his provision of high-value solutions to customers in that niche.
Stretching Your Resources
This then speaks to another reason that niches are an attractive alternative for small businesses. In a niche market it's easier to stay abreast of the felt needs of your target customers and to customize solutions to meet these needs. As a startup, most of us don't have a huge pot of money to throw at product development or low-turnover inventories. Nor do we have wholesale funding for market research.
But there is much less expense in researching the needs within a niche. And if we are successful at doing so, we can gain the most mileage from our limited resources for developing products and building inventory.
If you choose a niche market, you are by no means saying that you will be in that niche — and that niche alone — forever. Over time many niche businesses use their financial success to fund the startup of additional niche businesses.
Marketing in Multiple Niches
Another friend of mine had a thorough knowledge of computers. And his wife was quite talented as a writer and editor. So, working off of their dining room table, they began a magazine which was narrowly targeted at C-Level executives and IT professionals in companies with massive computing requirements and budgets to match.
Only C-Level executives and IT professionals in companies that met this profile were encouraged to subscribe. And the subscription was free. The couple's business model built on the realization that certain advertisers would pay premium rates to have their ad appear in a magazine read only by decision-makers at this level.
Their business model was profoundly successful. It's profits allowed the couple to start another niche magazine appealing to a different executive population. Then another magazine. And another.
When they finally sold the family publishing business for millions of dollars, they were distributing seven highly successful magazines, but each one in a narrowly-defined niche.
Niche Market to General Market
Niche businesses also have the potential to evolve into more generalized services. A local carpet cleaning business built such a solid reputation for reliability and quality of workmanship that it capitalized on this reputation to expand into carpet installation.
With success there, they added wood and tile flooring installations to their offerings. Then they have moved into counter-top installations. But the ultimate success of the more generalized approach depended largely on the customer base, market awareness, and brand name recognition which they built with a niche approach.
Now, don't conclude that serving a niche market is always the best choice for a startup. In the right circumstances, the decision to target a general customer base is indeed a wise one.
Just to cite a single example, consider a startup in a small town that is directly in the path of sprawling growth from a nearby metropolitan area. The startup may be positioning itself to take advantage of the population that will soon surround it rather than the population that is on site today.
In the meantime, while waiting for population growth to overtake it, the business may need a generalist strategy to draw enough customers to remain viable. Later, as the population swells, the business will already be established with a loyal following. The company's dominant position in the local market will increase the cost of entry for any would-be competitor.
As you can see, the decision of whether to compete in a general market or a niche market is highly consequential. Look carefully at all of the factors that should influence your decision and weigh them carefully. Realize that your choice may not be between the right way to go and the wrong way to go. Both approaches may have a case to be made for them. But one decision, more so than the other one, is likely to maximize your profitability.