Stop Shooting For the Moon! Raising Prices Won't Raise Your Profits. Catering to a Niche Will.
College prices are perpetually on the rise -- a report by the College Board indicated that the average student at a four-year public institution pays almost $21,000 annually, an increase of more than 3 percent since 2016.
Senators Dick Durbin, Al Franken and Angus King have placed the blame squarely on textbook prices in the legislation they dubbed the “Affordable College Textbook Act.” The lawmakers reported that, 2011 to 2016, new textbook prices increased about 38 percent, meaning that according to the most recent research, the average student was spending $1,200 annually on books and supplies.
While some people would argue that making textbooks cheaper would help fix this problem because it would lead consumers to buy more copies, the reality of economics is very different.
The target audience for academic books, after all, isn’t just any reader -- it’s a very specific reader who values these books' subject matter and format. Therefore, the market is incredibly narrow. So, arguing that these works would do better as lower-cost paperbacks marketed to wider swaths of customers makes no sense.
You might apply the same scenario to entrepreneurs. Far too often, entrepreneurs cater to too broad of a customer definition: Every entrepreneur, like every author, wants to appeal to as broad an audience as possible, but that’s not always realistic.
What is realistic is that business owners who embrace the power of a narrow focus can turn a significant profit while catering to a niche audience.
Narrowing your niche
The first thing that matters when you're starting a business is to know your customer. Your target shouldn't be something generic, like “men aged 25 to 40,” because there are too many differences among members of that category.
Value is always in the eyes of the customer, and not understanding your potential customers means you cannot possibly know what they value. You should know how they behave and how they might react to your offer.
Academic publishing again provides a great example, as the audience is quite different from readers of the latest Harry Potter installment. Researchers and graduate students undoubtedly find the academic material worthwhile, but the audience will typically stop there. Academic journals will never become New York Times bestsellers because the content -- while incredibly valuable to university libraries and classrooms -- doesn’t appeal to the average consumer.
As such, it makes no sense to lower the price of a book that is ultimately going to be purchased by an incredibly narrow audience. A lower price might marginally increase sales volume, but the small increase in the quantity sold will be unlikely to offset the massive decrease in total returns. All highly specific goods function in a similar manner.
Many entrepreneurs get into trouble by casting a wide net. It’s actually much more costly to cater to a larger audience and harder to make your offering uniquely valuable, thereby making it unnecessarily difficult to break even. Catering to an audience that’s too large and diverse will ultimately make it impossible to identify pain points and close a sale.
The more narrowly you can define your customer, the easier it will be to understand his or her needs and deliver relative value. If you offer enough value, you can charge a high enough price to cover your associated costs. In other words, narrow is lucrative when it comes to business.
Targeting the right customers
Even products that now have mass-market appeal started out with niche audiences. Most technologies start with small groups of passionate early adopters -- look no further than the rise of virtual reality headsets -- before ballooning beyond those boundaries to hit larger markets.
It’s certainly possible to enter an established market and sell a product that appeals to everyone, but it’s a tall order to compete against established actors selling massive quantities. A more reasonable formula for sustainable growth is to find a niche market you can dominate and slowly grow outward. Narrow in on your own niche with these three steps:
1. Identify your specific customer. I know I’m really drilling into this point, but it’s important to figure out what type of person you’re selling to and what makes him or her tick. The more information you have, the more realistically you can look at which product features your customers truly appreciate.
Identifying customers makes it easier to cater to this audience by proactively determining what these people value, how they behave and how they’ll react to your offer. In fact, 60 percent of successful innovations come directly from customers, according to an academic study by the Institute of Management Services.
2. Connect with your customers. What someone says out loud or clicks on while using Facebook doesn’t tell you what that person actually cares about. That’s a misconception. The best way to get to know your customers is to spend time with them. If you make that investment of time and effort, they'll reciprocate with invaluable feedback. Research from SurveyGizmo shows that nearly 75 percent of consumers in one survey were willing to offer feedback if companies simply asked for it.
You’re never too far up the corporate ladder to interact with your community. Mark Zuckerberg, Elon Musk, Richard Branson and other billionaire tech executives still keep an ear to the streets and listen to their customers. Musk even personally responds to customers on Twitter. If he can find the time to connect with customers, so can you.
3. Make their dreams come true. People such as Musk and Amazon CEO Jeff Bezos succeed by making people’s dreams a reality. The best sale is the one the customer makes for you, and that’s done by offering a deal too good to resist. Amazon had 63 million Prime customers last year and accounted for 43 percent of all online retail sales in the United States. This wasn’t an accident.
Amazon offers Prime customers fast, free delivery of cheap products. With an Alexa-enabled device, you can place an order with your voice. With a Dash button, you don’t even need a computer. This convenience helped Amazon grow from a niche bookseller into a retail juggernaut worth more than all the department stores in the United States combined.
While I appreciate attempts by the federal government to make higher education more affordable, forcing a lower price for textbooks will only put a strain on the publishers and the academic writers generating them. It’s hard enough to gather credible information in today’s fast-paced world of social media and fake news; squeezing the margins of people trying to educate the world seems a bit counterintuitive.
Authors of academic texts must simply realize they’re never going to keep pace with Stephen King, so they had better price each copy accordingly. In the same way, entrepreneurs should resist the temptation to shoot for the moon and instead stick with a grounded approach of appealing to a niche audience before building out. How do you grow your business? Start small and scale up.