I was asked “Paul, what’s the difference between niche marketing and differentiation?”
I can understand the confusion because niche marketing and differentiating your business are related concepts but you can:
- use niche marketing principles and not be differentiated; or
- differentiate your business and not practice niche marketing.
Most of the time, successful businesses do both – they are differentiated within a niche market.
Let’s see how they do it.
Niche Marketing Concepts
Niche marketing means that your business focuses on particular types of customers or customer problems to the exclusion of other types of customers and problems.
It’s what I think of as bullseye marketing.
The aim is to attract customers who fit the characteristics of the bullseye in a target and the further a potential customer is away from the centre, the less mutual appeal. A customer from an outside ring isn’t interested in the business and the business isn’t interested in the customer.
The opposite of niche marketing is the problem I describe in Any Woman Will Do Says The Desperate Man. This is casting the net wide and lacks any appeal to anyone – it’s the sign of desperate marketing.
Niche marketing is powerful because the specific needs of particular groups of customers are not being fully met by more general suppliers. Customers are being forced to buy products and services which are in the outer rings of the bullseye target because they can’t find anything better and buying is better than not buying.
Imagine you’re on holiday in a place where you expect it to be warm and sunny but when you get there, it’s cold and rainy. You may find yourself buying a coat and umbrella that don’t match your personal tastes. You wouldn’t buy them if you were at home and had plenty of time and choice but you don’t want to be cold and wet.
That’s quite an extreme example to make the point of buying “make do” products but if you consider what you’ve bought in the last few months, it may well have happened more often than you’d have liked.
The basic dimensions for establishing a niche market position are:
- Who is the target customer?
- What is the customer problem and what is the solution?
- Where is the business operating and where are the customers?
A niche market position requires a deliberate choice since it implies exclusion of customers outside the targeted area.
Many businesses only appeal to the local market because customers will only travel so far or it’s only economical for the business to travel a limited distance to customers. If all you have is a geographical restriction, then I don’t consider that you’re using niche marketing.
You can have a niche position with:
- a specific who and general what – clothes for teenagers
- a general who and specific what – hats
- a specific who and a specific what – hand made suits for male executives
These may or may not be restricted geographically. The development of e-commerce stores on the Internet has made many niche markets commercially viable precisely because the products can be sold throughout the world.
This concept of whether the niche is big enough is important and the bullseye target analogy is useful again. Market research may show the following likely sales:
- bullseye – £150,000 – no niche competition
- inner ring £750,000 – no niche competition
- middle ring £5,000,000 – two niche competitors
- outer ring £25,000,000
Imagine you’ve done your numbers work and you know that you need at least £500,000 sales to have a worthwhile business which is going to generate enough profit.
This clearly shows that the niche for the inner ring isn’t viable but the inner ring is and gives you considerable upside. It can be further extended by making small incursions with specialised products into the middle ring without destroying your position.
On the other hand, the £500,000 needed for a viable business might be right but your research shows you:
- Bullseye – £5 million – no niche competition
- Inner ring – £20 million
Here I’d say that your business opportunity looks good but I’d question whether you’ve really identified a bullseye. Your business may be vulnerable to being micro-niched.
Differentiating your business is about establishing clear reasons for winning buyer preference.
The biggest name guru on competitive advantage, Harvard professor Michael Porter made it clear that businesses can be:
- Differentiated in the wide market.
- Differentiated in a narrow, focused market – what we’d think of as a niche market.
Personally I think it’s much more natural to differentiate in a narrow market because you can precisely target the needs and wants of buyers.
Differentiation in broad markets is often based on either unique technology protected by patents, networking effects (thinks Windows for PCs as the de facto standard operating system) or brands.
People will buy an iPad or an iPhone because it is Apple. The basic product functionality may be very similar to other makes but the differentiating factor is the brand – “I want an Apple because my friends have an Apple and I want to be part of the in-crowd.”
They will buy a BMW car because of the prestige of the brand name and the image of the ultimate driving machine.
My blog is devoted to how to differentiate your business and you’ll see that I believe there are seven key dimensions to differentiation which you can get to by answering who, what, how, why, where, when and how many. Your answers need to be both multi-directional (e.g. who can refer to whom the customer is, who you are as the business owner, who the employees are, who the suppliers are) and specific (if you define your business with general rather than precise words, you’ll lose the power of any differentiation.)
The Difference Between Niche Market Positioning & Differentiation
The cross0ver is clear in the core questions:
Niche marketing is primarily about who, what and where.
Differentiation is about who, what, where, when, how, why and how many and takes a broader view.
You can be differentiated by staking out a clear niche position and you’ll appeal to bullseye customers e.g. think of a business expert who has identified his niche as marketing advice for accountants in the UK.
That’s very clear on the who, what and where and you can see that staff retention issues for financial advisers falls well outside the specification but it would fit a wider definition of “business advice for professional service providers”.
Any accountant who wants marketing advice is going to be attracted to the specialist. It’s a bullseye.
But what if the “marketing advice for accountants” is a big market?
It will attract new competitors who have a choice:
- Battling it out in the niche without any differentiation
- Differentiating by sub-niching and focusing on marketing advice for small accountancy practices with limited marketing budgets
- Differentiating by providing done-for-you marketing campaigns with a guaranteed return on investment of 500%
Having a niche may be enough to differentiate your business but you need to be looking for ways to go beyond it if a new competitor appears.
It’s no different from the shoe shop owner who makes a good profit in the town where he or she has a monopoly. The problems start when a new competitor moves in – and that may be another shoe shop or a supermarket superstore which sells shoes.
There has to be a clear reason for some customers to decide to buy from you.
My advice is to think “niche marketing AND differentiation.”