Street Smarts: The Myths About Niches
First you find a good market niche. Then you get ready for it to change and keep changing.
Published August 2004
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COMMENT ON THIS ARTICLEMost people starting out in business understand that a new company needs a niche if it's going to survive long enough to get itself established. You need one because it allows you to separate yourself from the crowd. It defines which customers you should target and what you can offer them that other suppliers can't. That's critical when you're living off a limited amount of outside capital, as almost every start-up is. You have to make sure that the capital lasts until your customer base is generating the cash flow required for the business to stand on its own. A good niche gives you the means -- and the time -- to do that.
There are, however, three myths about niches that can get in the way of building a successful business. First and foremost is the myth that you have to choose your niche before you start your company. Granted, it's sometimes possible to identify a niche in advance, but often you can't see it until you've actually gone out into the market and begun to sell. That's particularly true when you're entering a highly competitive industry, which is always my preference. Whatever business I go into, I like to know that other people have already figured out how to make money in it. Their success tells me, first, that the market is educated and, second, that there are established ways of doing things I can improve upon. The downside is that there aren't any obvious niches available.
Understand that, in saying you don't need to know your niche before you start, I'm not suggesting you shouldn't have a theory about how your business will succeed. It's just important to remember that theories are frequently wrong. You'll encounter both problems and opportunities you didn't foresee. In responding to them, you'll acquire new information, and that information may well allow you to zero in on a niche you didn't even know existed. Where will the information come from? Your customers.
In almost every company I've started, my customers have told me what my niche should be. Take my records storage company. When I started out, I thought I would be successful by offering great service, state-of-the-art technology, and competitive prices. That's how I'd built Perfect Courier, my Inc. 500 messenger business. But my first attempts at selling our services were miserable failures. Although I learned many valuable lessons from them (see "The Path to the Top," February 2003), they didn't point me to a specific market. So I did what every entrepreneur does: I went through my Rolodex and began working my contacts, many of whom happened to be lawyers.
Pretty soon a curious pattern emerged. A lot of the law firms I talked to kept their records at small moving and storage companies located in New York City -- and had nothing but complaints about the service they were getting. The complaints didn't surprise me. The majority of moving and storage companies got into records storage by accident, when people began coming to them with boxes of documents instead of furniture. Because the business pretty much fell into their laps, most of the companies never developed any real expertise and never bothered to master the latest technology. Their facilities tended to be old and rundown; their racks were makeshift; and there were few if any systems in place to help customers who had to retrieve documents from the boxes they'd stored.
Money was not the issue. My customers said they cared about service, not price -- always music to my ears.
But why, I wondered, didn't those dissatisfied law firms use one of the large records storage companies like Pierce Leahy that were set up specifically to serve the needs of customers like them? Were they just trying to avoid the higher fees that the big companies charged? No, the lawyers told me, money was not an issue. They cared about service, not price (always music to my ears). The problem was that the big records storage companies had built their storage facilities so far outside the city that it was impossible to retrieve documents from them on short notice -- say, within two or three hours -- as law firms must do from time to time.
Bingo! I'd found a niche. I already had a facility that was located across the East River from Manhattan and that was dedicated to providing top-notch service for records storage customers. Now I had an entire industry to go after. We landed our first account with a law firm in 1991 and targeted most of our sales efforts at the legal profession for the next three or four years. By then we had a customer base that was solid enough for us to start branching out.
It was pretty much the same story with my other companies. At Perfect Courier, I found my first niche through a customer at an advertising agency who told me that she and her colleagues were spending a lot of time trying to match deliveries to clients, who would then be billed for the service. All she wanted from us was an invoice that would do the work for her. That sounds like a simple request today, but in 1980 few small companies knew anything about computers. My company happened to have one, and we developed the capability to produce such an invoice before anyone else. As a result, we were able to offer a unique service to ad agencies and other professional service firms that charged deliveries back to their clients. It was a substantial niche, and we dominated it for years.
