Dr Jeff Cornwall

A niche strategy is the most common type of entry strategy for start-ups that I see. Entrepreneur magazine reports on a study that found that niche businesses are growing at 20 – 25% a year.
In a niche strategy, the entrepreneur finds a small part of a market that is not being served or is significantly underserved. A niche strategy gives the entrepreneur a safer market with less competition and a more dependent market.
Generally, a nice strategy is a good way to enter the market for a new business. It usually takes fewer resources for the start-up, due to lower marketing costs and the ability to start on a smaller scale. Success rates tend to be higher for niche businesses since they have less direct competition. Without much competition, niche businesses can charge higher prices, which allows for quicker positive cash flow during start-up and better margins once profitable.
But, there are some cautions that an entrepreneur should be aware with a niche strategy:
– Entering a niche requires adaptability in your plan. Many entrepreneurs assume that since the niche is a relatively safe place, they can establish their business plan, execute it, and all will be good with the world. But, if you miss the mark on exactly what the niche wants, it doesn’t matter how safe the niche is, the customers will not automatically buy from you. You still have to offer what they want. No matter how much research you do ahead of time for your plan, you can still misjudge the market.
A case in point is one of the retail businesses our students started here at Belmont. Lauren started a small clothing store called Feedback. Her plan was to sell “retro” used clothing. Such stores had done quite well in other college locations. However once she opened, she quickly discovered that what was selling were the inexpensive “designer” clothing. This was not going to be the main focus of her store in her plan. Although she had a limited budget, she realized that she had to quickly transition her inventory and get the word out about her expanded offerings from up-and-coming and local designers. She had misjudged the needs and wants of her niche market, but was able to quickly adapt. Her business is now growing.
– Niches Change. Even if you get the market right in the beginning, niche markets (like any market) will change over time. Success in a niche requires that you adapt as your market changes. Too many entrepreneurs get stuck doing the same thing or offering the same product while their customers’ needs and wants evolve. Even though it is a niche, the market is not isolated and is subject to the same forces and trends that can impact any market.
– Niches Can Go Away. No market is forever. Niches are the type of market that can dry up, sometimes quite suddenly. Again, adaptation can offer some hope, but if the decline is too rapid many niche businesses will fail.
– Niches Can Grow. While significant growth in your market may not sound bad, it can attract more competitors. And if it grows large enough, it can attract some of the “big boys.” At some point your cozy little niche can feel quite crowded and really is no longer a niche. That requires that you adapt your business strategies to this more competitive market. Your pricing will be forced downward, while the cost of business may go up due to increased marketing costs, greater expectations from your customers, and higher labor costs due to more competition for your best staff. Your goal becomes keeping market share in the increasingly competitive market, as you will now need volume to assure profitability.
So is a niche a good place to enter the market? Absolutely. However, change is inevitable and even in a niche market an entrepreneur needs to be able to adapt to survive over the longer-term.