Market niches

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What is a niche?

Some ideas about what a niche is:

A part of a market

Obivously, a niche is a part of a bigger market. However, that's not enough.

A uniformaly addressable market segment

For me, niche usually means something like

A segment of a market, that can be addressed uniformly

Examples:

  • Maybe there is such a thing as a niche for caravans (unless you think that the market for caravans is too big to call it a niche). You can address prospects in this group uniformly (to a certain extend), like through magazines
  • Maybe there is a niche for something like off-the-road caravans. This fits the definition of a niche above a bit better: It's relatively small (compaired to the main category of caravans) and prospects in this niche can probably be even more uniformly addressed, like through enthusiasts websites and magazines
  • Maybe there is a niche for something like gothic German off-the-road caravans. If so, it would definitely be a small part of a bigger market, and communication can be even more uniformly.

A collection of search phrases leading to the same product(s)

A refreshingly different way to define what a niche is:

A collection of search phrases that lead to a product, or collection of products

This captures the same aspects as in the definition before, but more suited for online marketing.

I also heard somewhere the addition ...A niche is a place to which 6 or 7 strong key phrases lead. That seems like a normative addition concerning the size of the niche, but I don't know the context of that statement.

What niches are not

Let's now look at what seem to be the limits of a niche:

Disjoint sets

It seems that you can't reasonably form a niche from two smaller niches that have nothing in common; that form a disjoint set], as they cannot be addressed uniformly.....

Examples:

  • Gothic German off-the-road caravans and luxury caravans
  • A magazine for both recently graduated students and unemployed people without school diploma
  • A news site for BMW & Mercedes enthusiasts
  • A RedBubble shop with a hodgepodge of wildly different designs, all applied to all products that RedBubble offers.

Too big for uniform communication?

Another limit of a niche seems to be, when it becomes too big to be addressed uniformaly. In the next chapter, we take a closer look at this concept. For now, just some examples:

  • Is coloring books a niche within books? When someone would type in coloring book on Amazon, would it be possible or likely that the first hit is what he or she was looking for?
  • Is caravan a niche within mobility? This actually brings another question: Is there an upper limit to what a niche can be, because it can't reasonably be considered part of something bigger?

Not part anymore of something bigger?

When something isn't reasonably part of something bigger, can it still be called a niche? Some examples:

  • Are caravans a niche of mobility, or a niche of holliday means? Or not a niche, but rather a market of their own? It probably depends on the context
  • Are distribution belts a niche of something?
  • Are cars a niche of something?

A continuum of niches

Concerning limits to the size of niches, it may help to see niches as something on a continuum, where products are part of a series of increasingly bigger or smaller niches. E.g.:

  • Coloring books for visually impaired adults » Coloring books for adults » Coloring books
  • Carbon brushes for Bosch Drill ABC-123 » Carbon brushes for Bosch ABC-123 » Carbon brushes for Bosch » Carbon brushes.

Note:

  • The larger the niche, the harder it will be to uniformly address the public for that niche - This communication challenge is on a continuum, too
  • The smaller the niche, the easier communication gets ánd the easier it is to develop a superior value proposition.

I love to work bottom-up or case-by-case, and the concept of a continuum of niches, fits that perfectly: Start with a niche of one product for one kind of customer (maybe create a persona for this). Once this works, start expanding the niche. When it doesn't work, you can be quite sure that there is something fundamentally wrong, as it wouldn't be reasonably possible to generate a better proposition. This approach does have one major problem: It's very time consuming. So in practice it might be more handy to start a bit bigger.

Aspects of niches

Some aspects of niches that are relevant later on in this article:

  • Size
  • Equilibrium [1]: Is it a seller's market or buyer's market? Can you quantify this?
  • Maturity.

Some aspects that won't be dicussed further for now:

  • Whole year niches (evergreen) vs. seasonal niches (cyclical)

Size of a market

The size of a niche or market, is the amount of revenue that is generated in that market or niche, in a given period.

In practice (for example, when compairing niches) it might be more practical to estimate market size in terms of SAM (serviceable available market): How much of that market you could service.

I have the impression that market size is mostly determined by demand, rather than supply, eventhough suppliers can exert a considerable influence on market size (e.g., through branding).

Maturity of a market

With maturity, competitiveness or development of a market, I mean how well-developed propositions are in a market. It seems that usually, the larger the market, the more developed it is.

This trade-off between size and competitiveness, might be a reason to search for niches: To strike the optimal balance between size and ease of developing a superior proposition.

Examples:

  • Tesla choosed the niche of electrical cars within the market of cars. This is a very large niche in a well-developed market. Risk and potential for rewards are accordingly high, requiring large amounts of ventrure capital and strategic entrepreneurship (e.g., market buying or lead losses)
  • An English-speaking webshop selling distribution belts in the US: Quite a large niche and probably one with some established players with well-developed propositions
  • An English-speaking webshop selling distribution belts in Estonia: That's a niche worth maybe only some tens of euro per year (very small). It's a niche that is probabaly not served at all (maybe indirectly, like through Amazon.com)
  • An English-speaking webshop selling ditribution belts in Germany: Quite a niche and probably quite developed.

Equilibrium of a market

The equilibrium of a market means:

  • Where the market equilibrium is on the spectrum from buyer's market to seller's market
  • If there is more demand than supply, or the other way around
  • Whether buyers or sellers have more leverage.

Bigger market vs. multiple smaller markets?

A hockey curve that depicts profit over time for a generic business with upfront costs (contrary to e.g., per hour service work)

What is better? Serve one large market, or several small markets?

To start with, we have to figure out what better means. Here it means NPV, or Net Present Value: Which approach would create the highest NPV

The answer depends on what you are good at, or what your preferences are:

  • What you're good at: How would you call that? Core competencies, Strategic assets or even means of production? Are you (or your organisation or network) better in serving a relatively large market, or are you better in serving a multitude of smaller markets?
  • Preferences: Maybe serving multiple small markets suits your lifestyle of keeping it simple? Or maybe serving a larger market size suits you better, as you are young, hungry and ready to take over the world?

This preference & competencies translate into a certain structure concerning costs, revenues, profit and time. With the help of some spreadsheet magic, this would translate into a hockey curve as depicted

Personally...

The last 18 years, I've mostly been into online marketing for webshops.

General:

  • Experience with relatively small niches (TAM: € 10 mln/year in EU?)
  • Experience & strategic assets concerning automation: I can relatively easily clone an existing business or existing webshop. I have programming libraries available for this and I consider this one of my main means of production
  • Experience & strategic assets concerning management of a large number of products: As before: My programming libraries in this area are a means of production for me.

Specific:

  • I can clone existing webshops of one of my customers in about 45 minutes, including about 15.000 products, into a fully functioning new webshop (e.g., for another country)
  • I've created market leaders (in niches!) in about 18 months.

Conclusions:

  • I am geared towards addressing multiple smaller niches, rather than to addressing relatively large niches: I can do that for such low costs, that it will be very hard for others to compete with me
  • There is aditional reason for this preference: I believe in working bottom-up: Start with a superior proposition in a small niche. Expand the niche from there.

See also

Sources