Market Niches; Gimme One! Now! But How?

Last issue I took most of this space to discuss some tactical measures businesses could take to respond to the extremely difficult competitive conditions in the snowboard industry. I went on to say in what may have seemed like an after thought that none of those measures mattered if you didn’t have a way to compete. That is, a market niche you can succeed  in.

Then I ran out of space.
 
So it’s a month later and time to talk about market niches as part of your business’  strategy.
 
What’s a Niche?
 
Well, for one thing, it’s a term that’s thrown around a lot without much specificity. A market niche exists when you can offer features and benefits in your product or service that appeal to a specific customer group. These features and benefits have to be ones that your competitors are unable or unwilling to offer. Put another way, it’s  a portion of the market where growth prospects are acceptable and competitive pressures are manageable.
 
Niches can also be very difficult to identify, and your success in identifying them will ultimately determine your company’s success.   Is snowboard boots a market niche? How about women’s’ boots? Maybe women’s’ step-in boots? Perhaps women’s step-in boots with heel/toe lockdown. Let’s go one more step further and say that they can only be made of leather.
 
I suppose those are all niches,  but all or none of them may be a niche in which a successful business can be built. That depends not only on identifying the product characteristics and customer base, but the specific resources and capabilities of the company trying to succeed in the niche. And that, I suppose is why defining market niches is so difficult. They don’t actually exist until somebody has succeeded in creating or exploiting them.
 
Market niches are very dynamic. They change in response to economic conditions and the actions of all the players in the industry. What was the most popular highback binding three years ago would be tough to sell today.
 
Even the strongest niche doesn’t necessarily last forever.    When was the last time you sent a Western Union telegram? Okay, how many of you have even heard of a telegram? Visi Calc was the first computer spreadsheet program and was an incredible advance. But Lotus ate it for lunch and, in its turn Lotus, is being munched on by Excel. 
 
To companies that aren’t already industry leaders in snowboarding, a niche strategy means reduced expectations and cutting back operations. This is consistent with the general concept of market niches representing a small part of a market.   But that’s not always the case. The best market niches in the world are those in which the product is identified with the product category; Coke in colas, Kleenex in tissues. Maybe Burton in snowboards?
 
Burton’s market image is based on brand recognition built up over a period of years. They spent a lot of money on dealer brochures, riders, ads, and promotions when most other players didn’t have the resources to match them. Switch and K2 are trying to establish the technical standard for the step in binding as a market niche. Mervin Manufacturing’s market niche is based on their consistent appeal to a clearly defined group of young consumers. Sims seems to be focusing on being pure to the roots of snowboarding as a way to distinguish their products.
 
A market niche isn’t enough to insure a successful company. Beta was a better technical format for videotapes than VHS, but guess which one we all rent? Switch and K2 know that being first into the market and having the best technology (if they do) by itself does  not guarantee  their products will be adopted as industry standards. They are both involved in licensing programs to expand their market penetration.
 
Why Do Niches Exist?
 
A niche strategy is viable because smaller companies can take advantage of the compromises that larger players have to make as they expand their reach. As they expand their reach into more and more segments, over performance for some customers and under performance for others is inevitable.
 
In the snowboard business, we’ve seen some industry leaders increase minimum orders and impose other terms and conditions that all retailers can’t meet. Those leaders have found that it doesn’t pay to do business with an account if it can’t do a minimum amount of business with them. This perfectly rational business decision may create a niche opportunity for other players.
 
Community banks have survived the ongoing consolidation in banking (or have positioned themselves to be bought out at high multiples) by offering better service and being part of their community.
 
Continued growth means an inevitable reliance on larger accounts. Look at the numbers. Let’s say you are a five million-dollar company looking to grow ten percent. That means you have to sell another five hundred thousand dollars in merchandise. If you were to accomplish it all in new accounts, that would mean fifty accounts each buying ten thousand dollars of merchandise- not easy, but theoretically possible.
 
Now let’s say you’re doing twenty five million in business and want to grow ten percent, or two and a half million dollars. Finding two hundred and fifty new shops to buy ten thousand dollars each is probably not in the cards- especially in an environment where most of the possible customers are already carrying your product or your competitor’s. Larger dollar sales increases usually have to come from bigger customers.
 
Can You Create Your Own Niche?
 
Four things seem clear from the discussion above. First, even the most powerful niches don’t guarantee a company’s financial success. You have to do all the other things well, if not quite as well as your competitors.
 
Let’s say your new snowboard jacket hits the season’s colors and style dead on.  It’s got the latest fabric and the technical features everybody is lusting for. Maybe you can price it a little higher than the competition; but not double. You can be a week or two late delivering; but not a month or two. You’ll still have to finance your production. 
 
Second, market niches don’t spring forth fully articulated in a blaze of customer acclaim. Fred Smith, the founder of Federal Express, identified a powerful, distinct market niche but it still took time, work, money, faith and some good timing to make his idea into an industry leading company.
 
“The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible,” said a Yale University management professor in response to Mr. Smith’s paper proposing reliable overnight delivery service.
 
Burton didn’t exactly spring to the top of the pack over night either. I recall the story about Jake being unwilling to leave his trade show booth for a bathroom break because he was the only one in the booth and was afraid he’d miss a sale. It would be going too far to say that having a stronger bladder than your competition represents a market niche, but it’s indicative of how tough it can be to define one.
 
Third, the customer must perceive and accept the qualities of the product or company that you are offering, or there is no niche. If 300,000 1996-97 snowboards from Japan of almost any brand you can imagine show up in various chain stores this summer/fall for prices not too far over $100 (“Attention shoppers, we have a K-Mart Blue Light Special today on snowboards…….”) you are going to need a hell of a niche to sell many for north of 300 dollars. I have, by the way, no information that is going to happen, but I am concerned.
 
Finally, if too many companies pursue the same market niche, it’s no market niche at all. There’s no room in the snowboard market for another brand that wants to be “the high end board sold to core shops.”
 
Now What?
 
If you don’t have a market niche now, it’s probably too late to create one in the snowboard business. That’s not to say that somebody won’t succeed in doing it, but because of where we are in the business cycle, the odds against you are long indeed.
 
Just because you’re already in business doesn’t mean you have a market niche; just a customer base. Whether that base is sufficient to make you successful in creating a niche in a maturing market is another question. Make a start on figuring that out by asking: Who are my customers? Why do they buy my products?
 
Hunches don’t count. The usual glib and imprecise answers that seemed adequate when you could sell all the product you could get won’t be any help. Answering these questions is hard work. It takes time, planning and effort. The answer may never be “right” but it can keep getting better.
 
With that information in hand, stand in front of a full-length mirror. With the most serious demeanor you can muster (difficult, granted when you’re talking to yourself in a mirror) repeat the following, one at a time, with firm conviction
 
·         I can compete based on price.
·         I can compete based on image.
·         I can provide better customer service.
·         My technology differentiates me.
·         I’m king in one geographic area.
·         My graphics are better than anybody else’s.
·         We’re closer to the market than the competition.
 
The list above is by no means complete, and you should modify it to fit your situation. The ones that don’t leave you feeling ridiculous or laughing hysterically are probably worth exploring if you really understand your customers.
 
The above exercise may appear goofy, but the business of determining your market niche and basis of competition is deadly serious whether you’re a materials supplier, brand, or retailer. If you can’t annunciate it clearly and quantitatively in no more than a paragraph, you’ve got work to do. Don’t put it off any longer.