From the October 2003 issue of Startups

Starting a niche business--one focusing on a small, underserved piece of a market--is often key to entrepreneurial success. But how do you identify your niche? Here are some terms to understand:

  • A niche market is a well-defined, enduring market segment with common characteristics and specific needs; it is always present, but often overlooked and underserved. Niches are consistent: They grow, and if they fade, they fade slowly. An example is snacks packaged for airlines.
  • A fad market is created by popularity that rises rapidly in a short time and fades, either quickly or slowly (think Pokemon). A fad market may disappear or remain in existence, but it declines in size to a small fraction of its popularity apex.
  • A market trend is an underlying evolution or change in habits, preferences or tastes in response to lifestyle changes, priorities, demographic shifts or a host of other phenomena. Trends often create or expand niche markets. For example, the gourmet coffee market captured by Starbucks arose in part from increases in disposable income, increasing distaste for public alcohol consumption and an expanding group of upscale consumers. The niche of gourmet coffee may have always been there, but the trend built the niche into a recognizable and growing market.
  • Lifestyle changes are trends that work their way into larger segments of the population. Starbucks reflects a lifestyle change where cafes not only replace bars, but also become meeting places for the masses. Lifestyle changes are more permanent than trends, and many start as niche markets.
  • A revolution is a massive change in a marketplace brought on by a shift in technology or a major historical event, such as the advent of compact discs or personal computers.

The key to correctly identifying a niche lies in understanding the customer base that forms it, the unique products and services that can be delivered to it, and the underlying trends that are likely to support and build it in the long run. Tennis provides a good example of the dynamics of niche markets. Remember tennis clothes and jogging suits? In the 1970s, people--particularly middle-aged people--wore jogging suits everywhere. Tennis and other athletic gear became a trend in the '70s, which marked a lifestyle change as midlifers went on an exercise kick. Parts of this trend did become marketable lifestyle changes, served by health clubs, spas and so forth. But for the purveyors of tennis wear, the apparent lifestyle change failed to give lasting lift, and tennis is once again more of a niche market.


Excerpted from Niche and Grow Rich: Practical Ways of Turning Your Ideas Into a Business(Entrepreneur Press) by Jennifer Basye Sander and Peter Sander