PICKING A NICHE: FOUR WAYS TO CREATE NEW MARKET SPACE

By: New Markets Advisors
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Niche environments create space for new life forms. Like an undersea volcano surrounded by bizarre creatures, commercial niches enable new types of business models and enterprises to flourish. The niches also provide a foothold from which these businesses can step into larger and more competitive markets.

The challenge about niches is that they are abundant, and some will be as eternally isolated as those undersea volcanoes. Picking your niche is a critical discipline. Four rules illustrate how to do this in a rigorous way.
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Target Customers Overserved yet Undershot by Existing Offerings — One Medical Group is a new concept in primary care medicine. For a few of a few hundred dollars a year, it enrolls patients in exclusive practices that provide extensive personal attention, same-day visits, lengthy consultations, and excellent customer service. But it is not for everybody. If you have a bevy of chronic conditions requiring tight coordination of a team of specialists, go somewhere else. One Medical is a great proposition for relatively healthy people who do not want to wait three hours for a 12 minute appointment. It may not scale to serve millions of patients, but its niche is plenty big to be attractive. Not only does the model offer an answer to over-stretched primary care physicians facing a wave of newly insured patients, workflow changes, and an older, sicker population, but it may also offer a route for small health insurers to escape an increasingly commoditized industry in which they have fundamental disadvantages.

• Target a Simple Buying Decision — Don’t try to be too clever. When I started one of the first mobile marketing companies in 2000, we fervently believed that we had a great way to market retail special offers to consumers. It was a pretty good idea, but 10 years too early. Retailers would have to align staff from a wide range of functions to give the proposition a try. A rival firm targeted radio stations that wanted to give listeners a way to interact with the DJ. This was an easy decision. It may not have held out promise to be a large market, but it was a fast place to get started that also legitimized the then-new idea of sending text messages to a company rather than an individual. Similarly, healthcare IT firms struggled for years due to the complexity of selling to medical practices, and the ones who gained traction first were those who focused on sending prescriptions electronically to pharmacies — a simpler idea that the pharmacies could help turbo-charge.
• Avoid Network Effects — Zopa had its first office next to my mobile marketing start-up. Like that company I founded, Zopa is still around but it never really scaled up. It was one of the first firms to pioneer peer-to-peer lending, where people with a bit of money to invest could lend funds directly to consumers who were scored according to their credit rating and other factors, bypassing all the overheads of banks and credit cards. This is an interesting idea, but it faced a chicken-and-egg conundrum. Does it build its list of borrowers first, or its lenders? Will it attract the worst borrowers? Eventually businesses can surmount these challenges, and the company is now lending over GBP 5 million per month. But it is not a great business strategy, particularly for a firm that is already established, seeks to re-position itself, and has an existing cost base it needs to cover.
• Embrace Small Competitors but Avoid Big Ones — Small competitors can help to educate a marketplace about a new category, and they provide reference points for competitive bids which supply new buyers some reassurance. Big competitors seize the limelight, give away free trials to show they have customers, and are often the first choice of purchasing managers who do not typically love to take risks. Competition can be good, provided that it is the right type of competition that creates new market space.

Picking a niche is an endeavor where patterns of success are invaluable. In addition to the principles laid out above, consider who has succeeded and failed in creating niches in your industry. What rules can be discerned?
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There is seldom one right answer to picking a niche, but there are definitely wrong answers. Thoughtful attention to these dynamics up-front can create large payoffs down the road.

Story by Steve Wunker.