Let’s say a small business is selling widgets. They don’t have a marketing plan – they will sell widgets to anyone. They sell a lot of widgets but not really enough to make a lot of money. They are at the point between getting by and being successful.
They advertise in newspapers and sell a few more widgets but hardly enough to cover the costs of the campaign. They do radio and TV commercials and lose money. They try direct mailing but the costs are high. Their problem? They haven’t identified their niche. They are trying to be everything to everyone (as far as widgets are concerned) instead of being everything to a particular group. As a small business, they need to identify their niche, build on it and grow small market by small market.
The easiest way for our widget company to find their niche is for them to imagine their ideal customer. The ideal customer is one that, because he or she is a good fit for what the widget company does best, gets the most benefit from buying the widgets and makes the most money for the company.
The fact that these customers benefit greatly from the “good fit” is important because, once you’re successful, your competition is going to be right there trying to do the same thing. If your “good fit” customers benefit because of what you do best, your competitors are unlikely to be able to do exactly the same things well and get exactly the same “good fit”. They’ll have to go elesewhere to find their own niche.
The other side of the equation is that these ideal customers have to be more profitable than average. The whole idea behind the niche strategy is that you’re going to focus on what you do best with your best customers to increase your profitability and grow beyond the initial niche. Your “good fit” customers are going to be willing to pay more to get the increased benefit resulting from the “good fit”.
For example say, in the case of our widget company, a study of its customers showed that 60% lived within 1 mile and walked home. A study of the product showed that these widgets were considerably lighter than other designs so that they were easy to carry. The company raised its prices slightly and found that sales remained constant among local customers but dropped for others. Profitability increased.
As a result, the company again slightly raised its prices and started a campaign of delivering flyers to every household in the area four times a year. They sold their parking lot and used the money to open a second outlet three miles away. They supplied 95% of the local market and were profitable enough to open a whole chain of outlets and become a regional supplier. That’s finding your niche and building on it.