A game plan for niche marketers

by Allan Nation

A niche market has been described as a "hole in the marketplace."

The reason niche markets are so sought after is that they provide the highest margins per unit of production. These wide margins allow minimally financed companies to start small and fund their growth from their customers rather than outside investors.

These high margins exist because the first occupier of a niche has no competition. You have, in effect, a monopoly position. And, monopolies are where the big margins are.

Too many graziers thinking about direct marketing are sitting back hoping someone else will pioneer a market in their area and thereby prove its existence. This is akin to a general allowing the enemy to occupy a hill and dig in before attacking it. It is almost a recipe for suicide.

Just as in war, in marketing getting there first with the most is an incredible tactical advantage that is very difficult to overcome. It is estimated that the second comer to a niche has to have a value proposition ten times better than the first to even attract attention.

What a niche marketer is looking for is an undefended hill to capture. Even an unarmed two-year-old can capture an unoccupied hill.

This absolute need to be out there all by yourself doesn't feel right to most commodity producers. Here's why.

In the commodity business there are definite cost advantages to locating in production "clusters" where everyone is concentrating on a similar commodity. These clusters have cheaper production inputs and services because the market is large enough to produce competition.

Marketing is even enhanced because in most commodities the product will have to be shipped out of the production area to be sold. The more of it there is the lower the transportation cost. For example, the cost per ton hauled by a unit train is a fraction of that hauled by a truck.

And again, a larger market attracts more buyers, which results in a better price for everyone. As a result, being "different" in the commodity world seldom pays as well as "fitting in."

No doubt, this dichotomy between what is good for business in commodities and what is good in direct marketing is what is so confusing about direct marketing.

A niche marketer is a pioneer. He wants to be out there all by himself. When the neighborhood starts getting crowded he will pick up stakes and move into a new wilderness where he can be by himself again. This need for loneliness makes sense in direct marketing as high margins can only exist as long as there is no competition. You must have a monopoly.

So, who defines a niche? The marketer does.

NOISY AND DIFFERENT

Every piece of communication a niche marketer produces must scream, "I am different" and then define that difference to your potential customers. This "difference" defines and circumscribes the niche that you plan to serve.

This need to be noisy and different goes against the grain of most farmers and ranchers who want to be peers and colleagues with their neighbors.

A niche marketer doesn't want a neighbor within 500 miles doing what he is doing. This is why highly unusual production models are better than conventional ones. As Joel Salatin has pointed out, you want to be seen as a "lunatic farmer" because that keeps away competition.

This is why a mini-cheese plant on the Alabama Gulf Coast is far more likely to find a far more lasting and profitable market niche than one in Wisconsin. No one in your area raising lambs or pastured poultry? Wonderful! If there are a dozen people doing it, forget about it. The high ground has already been taken.

Remember, in a niche market you are looking for what doesn't exist. Not what does.

Peter Drucker said a good judge of the validity of a niche market is to ask your neighbor what he thinks of it. If he agrees it is a good idea, it is probably not different enough to succeed as a niche market. He said the response you are seeking is guarded skepticism not enthusiasm.

With a niche-oriented business it is far riskier to hew too closely to the commonplace than it is to get too far out. What absolutely will not work is a smaller version of a successful large business.

Large businesses use volume to overcome small margins per unit of production. Take the volume away and they cannot be profitable. Small businesses have to have wider margins to be viable. Wide margins are only found in small markets.

My Dad always said the beauty of the United States was that its domestic market was so large that just about any peculiar interest you have could be turned into a million dollar a year business. The operative word here is peculiar.

Again, people who need wide-scale acceptance are unlikely to be successful niche marketers. The vast majority of people are not going to want what you are selling and many may even be hostile to you. The widest margins are found in markets that target no more than two percent of the population.

Can you stand being rejected by 98 percent of the people you try to sell to?

SUCCESS IS THE KILLER

Interestingly, it is not choosing a niche market too small that undoes most niche players. What kills niche marketers is success.

If you grow your niche market to around $15 million a year in sales, you will attract public company attention. Probably the wisest thing to do at that point is to sell to them. In fact, this could be a planned exit strategy for you.

The unfair advantage public companies have is a very low cost of money. If you get into a fair fight with them on a dollar for dollar basis, a small private company is sure to lose.

In markets with less than $15 million, your primary competitors will be people pretty much like yourself. They are attracted to your market by the wide margins you are enjoying and would like some for themselves.

Therefore, the best defense against these bootstrapping interlopers is to lower your prices. This denies them the margins they need to self-finance growth and effectively prevents them from ever growing into a serious competitor.

The beauty of being first is that normally you will have five to eight years of high margin monopoly before the interlopers are convinced your market is for real. You need to be using those years to dig your trenches and lay your land mines and prepare for the inevitable attack of competition.

Therefore the strategy in niche marketing is to:

1. Look for a market with no competition.

2. Be as different as possible and communicate that difference.

3. Concentrate on profits rather than gross sales.

4. Use early wide margins to build a defensive position that will allow you to lower your prices to stave off later small-scale competition.

5. Sell at the first sign of public company competition.

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