A follow up to 4 reasons it’s nice to be niche, here are tips for assessing the market you’re defining as your niche. This probably goes without saying, but if your target customers aren’t enthusiastic about your product, it doesn’t matter how many of them there are. Assuming you’ve got some product-market fit, how can you tell if you’re focus is too broad, or not broad enough?
Are you number #1 or #2 in your space?
If you’re not #1 or #2 (and you’re not on a fast-track to getting there), I’d argue you’re not focused enough. If you can’t define a set of customers such that you are the de-facto choice, it’ll be much harder to achieve the advantages of focus detailed in my previous article. Instead, those would-be advantages could become weaknesses.
“Me too” product – if you’re not focusing on a narrower set of customers than your larger competitors, it’ll be really tough to outdo them. Instead you’ll probably end up with a lesser-known duplicate of the leader’s product at best, and only a piece of it at worst.
Outgunned in sales and marketing – in a big market, big companies set the table stakes for sales and marketing. To make a name for yourself, you may need to shell out for trade show floor space, bid on expensive search keywords, or invest in uncertain RFP processes. The large competitors are doing all those things too, but they spread those costs over a much larger bookings number. By swimming in the big pond, you give up the advantage you could have had by being more focused on a smaller group.
Bogged down by switching costs – if your team is trying to serve very different types of customers, you risk additional costs and delays. Firefighting could hijack your strategic priorities if you have to do custom development to meet one customer’s needs, struggle through unexpected implementation requirements, or have to spend lots of executive team time to sell a prospect for whom you have no relevant references.
Over-extended team – if your team doesn’t agree on what their primary focus is, they may run in opposite directions. Your sales team could be selling features that were never supposed to be on the roadmap, or your support bandwidth could get chewed up by tricky customers while neglected bread-and-butter customers start to churn.
Is there room to grow?
Say you are a leader in your space, is the market large enough to support your growth goals? Ideally you’d have market research to help you answer that question, but barring that, here’s a back of the envelope calculation to give you some direction.
Start by estimating the size of your current target market (both vended and whitespace); if you need help, check out this post for market sizing tips. Make sure to only include customers who fit in your sweet spot (i.e. if your focus is SMB, don’t include the enterprise part of the market, or if you’re regional, only include your region).
Next, estimate the percentage of the market that switches or starts using your product type every year. If it’s a mature market (most customers already use you or a competitor), you can get at this by thinking about how often customers switch vendors—if they switch every 5 years, about 20% of the market switches per year. For newer markets with more previously unserved customers, you can get a rough feel for new vend by looking at how many customers you got this year, divided by your market share. So if you got 100 new customers (who were previously using nothing) and have 10% market share, you could guess that about 1,000 new customers came on-line in your market.
Now, calculate what your “fair share” of market growth is. Multiply the market size by the % of customers who switch vendors or start using a vendor each year. Then multiply by your win rate. If you made it your mission to being in every deal in this market, this would be your annual take. Is it enough to meet your growth targets?
Niches that pass the test
A great niche is one where you can be leader, and still have room to grow. This happens when either:
- It’s a new market, where you’re looking to acquire customers who were previously using nothing.
- It’s a fragmented market, where you’re looking to acquire customers who were previously using a small competitor.
- There’s another company with a leadership position, but you’re gaining share from them as the growing #2 player.
If you already have 80% market share in your niche, it’s going to be hard to continue to grow within it. If the market is already divided up between several larger players, it’s probably not a true niche for you.