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Why Serve a Niche Market?

A jack-of-all-trades is a master of none.

Entrepreneurs who see a direct correlation between the size of a target market and the probability of success miss the opportunity to serve healthy niche markets. Niche marketing not only provides startups with an opportunity to launch the business successfully, but can also help them grow into major players in a larger market. Healthy, profitable businesses such as Traulsen, Aman Resorts, Zamboni and Peet's Coffee and Tea all serve thriving niches.

Niche players share a common set of traits. These include a deep understanding of their customers and their customers' needs and the ability to stay engaged with those customers. Ideal niche market companies should consistently produce quality, innovative products and possess a genuine regard for the well-being of their employees. Serving a niche allows companies to focus on meeting the needs of a smaller group of customers without compromising their chance to increase the appeal to a broader market.

Look at some successful niche players--some that have gone on to become household names--to see how they achieved, and continue to achieve, success.

A Specific Interest
The iron is one of the oldest and most common household items. It's a commodity product that generally retails for less than $30. That makes the prospect of successfully selling irons priced from $900 to $2,500 farfetched, if not outright ridiculous. Nevertheless, that's exactly what Laurastar has done since 1980, selling more than 2 million really high-end irons to households in 40 countries. Switzerland-based Laurastar serves a seemingly small market niche of people who share one interest--pressing their clothing professionally at home. While forgoing a large market in favor of smaller one may not sound logical to venture capitalists, Laurastar has proved that serving a smaller subsegment of the market with special needs can be profitable and sustainable.

In some cases, niche players concentrate on serving a combination of subsegments of a market with similar interests or lifestyles. Aman Resorts doesn't target just sophisticated, wealthier travelers. Aman Resorts' niche market has a lust for faraway places, an interest in cultural authenticity and a desire for environmental friendliness. The company, which operates properties in Asia, Europe and U.S., has done away with the over-the-top pretentions associated with other luxury brands (think marble reception areas) in favor of small, distinct establishments. Each property is designed to be in harmony with its surroundings and the prevailing local architecture.

Similarly, Peet's Coffee prides itself on serving coffee devotees, or "Peetnicks," people who appreciate great-tasting coffee or tea from many places around the world. The company emphasizes smaller batches, freshness, superior beans and a darker roasting style that produces coffees with greater richness and complexity.

Facing Competition?--Innovate
Niche businesses are not immune to competition, especially from larger market players with substantial resources and economies of scale. So in the face of competition, how should you respond? Successful niche businesses will respond with innovation and higher-quality products, rather than cost-cutting measures.

When larger competitors threatened Laurastar, the company responded by hiring a team of high-caliber engineers to create the world's smartest iron. The new home pressing system is lighter, easy to handle and features sensors which produce steam automatically with a slight movement of the wrist as the iron is pushed forward; it stops immediately when the iron is halted or moved backward--eliminating the need to press a button to activate the steam. An active board and blower systems also assist with pressing the garment as soon as the iron moves. The combination reduces ironing time by half and saves energy.

Take Care of Employees
Another common trait of successful niche businesses is good human resource policies and labor relations. These companies have realized that offering superior service and products requires hiring, training and retaining superior employees. Niche businesses normally pay higher wages than the industry average and offer generous benefits. Most also enjoy much higher retention rates than their industries average.

A substantial group of niche businesses are family-oriented or family-run. For example, many of the employees at Traulsen and Zamboni are from second and third-generation families.

Peet's uses an operating strategy common among niche players--it does not franchise. The corporation operates all of its stores, this isn't just for quality control, it's to maintain high employee standards. The company offers extensive employee training, a health care plan and other benefits even to part-time workers. Aman Resorts publically attributes its success to its staff; everyone from cleaners to cooks and bus boys.

Growth Options
Once the niche market is saturated, opportunities for growth can come from a number of sources. One option is global expansion. After reaching 25 percent penetration in Swiss markets, Laurastar decided its next level of growth would come from selling abroad. Some niche businesses, such as Patagonia, grow naturally as their offerings and brand appeal to larger markets. Patagonia was originally established to outfit serious outdoor enthusiasts, but today its products have a large following among hip urban youths.

Some venture capitalists are reluctant to invest in niche businesses; this makes it difficult for entrepreneurs to fund their growth through that avenue, so growth sometimes comes from partnerships with larger firms. A by-product of this is many niche-market companies are eventually acquired by those larger companies. Traulsen, for example, was acquired by Illinois Tool Works after merging with Hobart, another food preparation equipment vendor. Sometimes the new corporate governance doesn't work. Take Nantucket Nectar; first it was sold to Ocean Spray and then to Cadbury Schweppes, only to be sold back to its founders.

The bottom line is that despite some difficulties--securing funding and managing growth-- many entrepreneurs who are focused on niche markets find it incredibly profitable and fulfilling. The keys to success are to stay in touch with your customers, understand their needs and keep a laser-sharp focus on serving those needs with a commitment to continuous innovation.

Dr. Bellisario is the founder and principal of TranStrategy, a Boston-based consulting firm that specializes in the commercialization of technology. She's a mentor with MIT's Venture Mentoring Service as well as a catalyst for the Deshpande Center at MIT. Dr. Bellisario can be reached at afarin@transtrategy.com.

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