Why do I need to focus on a niche market and how to choose it?

When I finished my master’s degree 12 years ago, I founded a company that didn’t work. I made many mistakes. In this post I’m going to talk about one of the main ones: not start with a clear niche.

Why do I need to focus on a niche?

Because often the following happens, at least for innovations o technologies which require changing the behaviour of the client: after talking to clients or potential clients from different market segments, and in order not to put all eggs in one basket, we end up implementing common functionalities. The result can be attractive for technology enthusiasts and innovators but not for pragmatists and conservatives who usually are decision-makers in most companies. This is because the product is not “whole”, it doesn’t solve 100% of the requirements for anyone.

The solution is to choose a niche and solve 100% of their needs to sell quickly to many pragmatists in order to become the leader of that market segment.

Once you have a predominant presence in a niche, it is much easier to expand to others:

  • You have references from pragmatics which are considerably more valuable than from enthusiasts or innovators. Moreover, as you already have loyal customers, new potential clients perceive less risk of you closing the company.
  • All the ecosystem make their products compatible with the market leader. Therefore, although the product of the leader is not the best by itself, the value it offers increases. Furthermore, other companies create products to compete or complement the one from the leader, making it more “whole”.
  • If you choose the first niche strategically (beachhead market), each new niche is easier to dominate. However, the first bunch of niches still require to particularize the product to match their needs. Anyway, it is much easier and faster to sell when you focus on a single market segment.

How do I choose the first niche or beachhead market?

1. Do a brainstorming session and create a list of 10-100 possible niches. If you already have clients, make sure to include the niches which perceive the most value.

2. Assign a score (e.g. 1 to 10) to each niche according to each of the following criteria:

  • Is it well funded? As entrepreneurs, we might want to do many things to help society. However, in the beginning, we need to start with a market segment which has enough resources to create a sustainable business. Later we’ll be able to go into other markets with fewer resources.
  • Do you have ready access to this market? We need to be able to talk to them and show them what we do. The distribution channel is important.
  • Do you offer a compelling value proposition? We need to do something at least 2 or 3 times better, it’s not enough 10% better.
  • Can you offer a “whole” product? A “whole” product solves 100% of the requirements of the market segment. Almost no one wants to buy a car engine but a whole car. Similarly, car vendors do not want to buy a car engine from new vendors because later they could create a whole car and go after their market.
  • Are you better than the competitors? Can they block you? Is there a clear leader? If there is already a clear market leader with a similar solution, this is probably not a good beachhead market. Or when competitors can block you.
  • Is this a strategic market (beachhead market) to leverage into additional markets? If we dominate this market, is it easier to get into others? Geoffrey Moore says that your strategy should be like bowling: Your first niche would be the first bowling pin and if you get it, more follow easily.
  • Is the niche aligned with your passions, personal objectives, values, etc.? We’re going to dedicate years to working on this so it’s something to consider.
  • Is the market size reasonable? Ideally, it should be enough to be cash flow positive, but not too big so we can become leaders of the niche in one year. The niche leader is often the one who gets 40% of the market segment – if there is no other competitor of a similar size (otherwise, 60%). It is possible that you have clients from other market segments, but Bill Aulet recommends dedicating at least 60% of your marketing and sales resources to the chosen niche.
  • Do all clients from the niche have similar needs and sales cycles?
  • Is there word-of-mouth between the niche? If you get some clients from the niche, are they useful as references for selling to other clients within the niche? Do they belong to the same professional organisations or do they operate in the same region?

3. Choose around 7 niches among the ones with the highest score, research them, go “out of the building” and speak with potential clients to have more accurate information. Then, update the scores from the previous step and choose a beachhead market. Next, make a list of most clients within the niche to calculate better the market size, check whether the niche can be segmented again, deepen your knowledge of the client, create a persona, etc.

Of course, often there is no obvious niche. In these cases, we need to choose one of the niches with a greater score and try. After being focused on the selected niche for some time, if it doesn’t work as expected, we can always go back and start with other ones. But focusing on one at a time is better than trying to sell to all at the same time.

You can find more information in the following books: Crossing the Chasm by Geoffrey Moore, Inside the Tornado by Geoffrey Moore and Disciplined Entrepreneurship by Bill Aulet.

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