A lot of time and effort is wasted developing the wrong niche markets. A focus area might make sense on paper, but the reality can be completely different.
When developing a new niche market, a firm needs to ask 3 questions:
- Is there a market?
- Can we compete and win?
- Will a market leadership position endure?
These questions may seem easy to answer, but they’re not. They are strategic questions that the executive team must wrestle with and resolve.
Is there a market?
For a niche strategy to be effective, customers have to perceive its value. More importantly, there has to be enough customers who value these specialized services.
Often times firms invest a lot of effort in a niche market that is too small. There may be a need with a select group of clients, but not enough to sustain a business. When investigating a new niche look at the size of the market and the percentage of potential clients that are seeking specialized services.
A specialized service is very hard to seed in a highly commoditized market that isn’t looking for premium services.
Can we compete and win?
A lot of niche strategies are selected haphazardly. For example, a firm may look at their client base and see they have several clients that are construction firms and proclaim, “We specialize in construction.” The challenge is other firms may have already played this game, and been working the space a lot longer.
When you look at your industry it’s usually easy to spot the firms that have focused on a vertical market such as construction, family business or car dealerships. What are you bringing to market that will disrupt the entrenched providers, and bring clients to your door?
Will a market position endure?
Twenty years ago focusing on family business was unique. The academic research and specialized services were just coming together, and hitting the mainstream. Today, serving family business is a commodity. It would be odd for an accounting firm or a financial services firm not to have services for family businesses.
Look for niche markets you can defend. Vertical or category niches tend to be hard to defend, because anyone can claim they are a specialist in a specific sector. Select niches that have barriers to entry. This could be a practice that requires specific licenses or education, or investments in talent and business processes. The higher the barriers to entry, the easier it is to protect your territory and grow your brand.
Ask the questions again and again
Gather qualitative and quantitative information to validate you are building the right niche. Ask the 3 questions repeatedly, and use them to guide your strategy.