Think small. The age of hyper-specialised businesses
published on 04.12.20
“Think small.” Listen up because a highly specialised business can be far more profitable than a mass-market one, provided that you know how to take full advantage of the benefits of being small while avoiding the risks typically associated with hyper-specialisation.
But can a micro-niche business tap into big markets? Are these kinds of hyper-specialised businesses profitable? The internet has certainly taught us a lot, including the fact that becoming highly specialised in a specific market can be great for business. To put it another way, in the analogue (non-digital) environment it is far harder to be profitable with this type of business. Why? Well, it comes down to market size. Suppose you are trying to open a shop that only sells replicas of the Harry Potter characters’ magic wands. Not so long ago, in a world that was purely analogue, this would mean opening a brick-and-mortar shop on a specific street in a city, thereby incurring the costs associated with renting premises as well as investing in stock, staff and, inevitably, awaiting the arrival of a handful of customers who are fans of the J. K. Rowling saga and want to buy magic wands. However, in the digital environment, this all becomes a little easier. A micro-niche is very small in the city where you live, but it can be huge when you start to combine all the existing micro-niches. To illustrate the point, the 400 customers visiting your shop in Barcelona could become 100,000 across the world. In other words, the internet transforms micro-niches into long tails, and the sum of lots of small sales can be greater than a mass-market business.
Nevertheless, before setting out on the adventure that is starting a business, it is always important to analyse every aspect and conduct sound market research. For a start, this is the best way to reduce the risk of committing to a business that will ultimately prove unprofitable, and it could even serve to improve the focus of the idea or identify other potential micro-niches.
There was once a great King in a small country
Operating a large business in a small market naturally has its benefits as well as its risks. The positives, generally speaking, can be an exponential conversion rate, an extremely committed and loyal community, large margins, and a strong brand image. The risks, a priori, must be considered in two important ways: from the viewpoint of demand, the market may be too atomised to be profitable, particularly in the case of businesses that are oriented towards the end consumer. If we examine things from the perspective of supply, hyper-specialisation may end in failure. In this scenario, it is worthwhile diversifying supply further within that specialisation to salvage the business.
Advantages of starting a business in a micro-niche
Banking on differentiation
It is worth bearing in mind that micro-niches represent a small share of the potential customers within a broader niche. As a matter of fact, in extremely saturated markets, having a hyper-specialised range can prove to be the master key that opens the door to escaping the dreaded price wars. As a result, differentiation often proves fruitful and allows for greater specialisation and personalisation of the products and services offered by the business. For example, when it comes to B2C, personalisation can open up very interesting niches. This is also the case with B2B, provided that the business is able to be the best at offering something different.
Having higher prices
It is important to clearly explain to the customer why they should pay more for a specialised product or service. Being different from the start helps to prevent comparisons with competitors, but first it is important to determine how much more the customer is willing to pay for this difference. The pricing strategy must therefore be examined and calculated from the very beginning as part of the market study. Furthermore, it is always worth remembering the maxim that many customers and companies are willing to pay more for better quality.
Little or no competition
A small niche will likely mean there are relatively few competitors, or perhaps none at all. It is important to understand that a lack of competition will not last forever, so it is best to take advantage of the opportunity to make a good profit on products and services while you can.
Running a hyper-specialised business makes digital marketing and communication much simpler. Having a presence and being at the top of the Google search results becomes a possibility without investing too much in digital advertising. The reality is that it is easier for customers to find a hyper-specialised business and, in turn, that business is then able to find its target audience with fewer problems. Less competition means better positioning.
Customers who are members of a community
Customers/users of a micro-niche are typically fans who are part of a community. Fans of products and services that they are willing to pay more for and are unlikely to swap for others. In fact, hyper-specialised companies are built around the affinities of their potential customers, which makes it easier to gain their loyalty. The trick is to identify niches with a strong community component in which purchases are made on a regular basis. It is also possible for the business to swiftly become a reference point for the community through brand image and differentiation.
The biggest risk: profitability
Stay alert, because knowing whether a business is profitable or not isn’t enough. Many entrepreneurs forget to calculate one of the most widely recognised profitability ratios in their business plans: ROCE, or return on capital employed. The percentage resulting from this equation indicates whether or not a hyper-specialised business is worth investing in. The ROCE value is derived from two variables, dividing earnings before interest and taxes, or EBIT, by the capital employed to get the operating profitability. Bearing very much in mind the profitability factor, another risk that should be assessed for micro-niche businesses involves analysing the average transaction amount and the margin. If they are not high, a way of increasing them with greater frequency must be sought.
The majority of entrepreneurs research the market as part of their business plan while also calculating multiple factors in their financial plan: the initial investment, the fixed costs of running the business on a daily basis, the capital required for the initial stock (if necessary), the margin on products/services, the initial communication investment needed to launch the business, and an estimated forecast of turnover.
There are also other risks inherent in hyper-specialised businesses, such as the cost of attracting customers, or to put it another way, making the target audience aware that you exist. Furthermore, it is worth calculating the customer lifecycle or lifetime value , which involves multiplying the average revenue from a customer by the number of times the product can be sold to them over the course of their lifetime.
Finally, if a micro-niche proves to be successful, it is important to be vigilant because the business idea can be copied. In this scenario, it is crucial to properly analyse the barriers to entry for the competition, because if there are none, a competitor can enter the market, copy the business and render it unviable.
Goal: increasing profitability
A profitable long-term niche is one which has loyal customers with specific needs and only it has developed the technology or concept that other competitors cannot easily match. And while it may be profitable, it is important to constantly explore new ways to make it grow.
For this reason, it is now no longer enough to find or create a marketplace in which to buy or sell. The community must be expanded exponentially through social media or cross-promotions with other similar niches; perhaps even diversifying sales channels or constantly seeking new revenue streams to make the business even more profitable.
The key is ongoing innovation. Constant innovation encourages repeat business from regular customers while attracting new ones to the community. This pursuit of innovation and repeat business must be in the DNA and be the defining characteristic of the micro-niche.
Author: Joan Margarit, Marketing and Communication Analyst.