What’s it: A niche market is a specific, small segment of a market with fewer competitors than the general market as a whole. It consists of a group of consumers with similar characteristics. They have unique needs and preferences, which makes them different from consumers in the general market. They are usually also willing to pay a premium price to companies that specialize in meeting their needs.
The market niche is attractive to small companies with limited resources. Focusing on that market is a strategic business decision to serve customers more satisfactorily. Apart from that, businesses can also avoid fierce competition in the main markets.
Niche market examples
There are many examples of niche markets. Here are some of them.
Shoes. There are various types of sneakers, sports shoes, and boots in the shoe market. Each represents a specific and different consumer need.
Foods. An example is an organic food. Although they are more expensive, they promise better quality, health, and environmental friendliness.
Clothes. Luxury clothing designers typically target a group of people with specific tastes, price points, and quality preferences, such as artists or politicians. They also often customize one product for one person.
Difference between a niche market and a mass market
The mass market has a large number of customers. Companies ignore market segments because they assume consumers need the same products. They think consumers have similar needs and tastes.
Products are usually standardized, allowing companies to apply mass-production methods. The company strives to achieve higher sales volumes to improve economies of scale and lower per-unit costs.
Because the products are relatively similar, price becomes the basis for competition in the market. The switching costs are relatively low, so consumers are disloyal. They easily switch to competing products when a company increases its price.
A niche market is a specific part of the entire market. Companies serve distinct customer needs, which are different from customers in general.
Due to the small market size, economies of scale are low. Thus, companies find it challenging to make higher profits by increasing sales volume. Instead, they usually rely on differentiated marketing to turn a profit. They develop unique products, so consumers are willing to buy at a higher price. If successful, they get high-profit margins per unit.
Niche market strategy
In his generic strategy, Porter divides the ways companies pursue competitive advantage into three:
- Cost leadership strategy
- Differentiation strategy
- Focus strategy
Cost and differentiation leadership targets main markets, where there are many customers. Under cost leadership, companies focus on reducing operating costs to achieve high profits. They strive to operate at high efficiency for every stage of the value chain.
For example, companies rely on mass production to achieve higher economies of scale. To do so, they target the mass market so they can sell products at high volume.
To maximize profits, firms set prices at the industry average. Or, they lower it slightly below average to attract more purchases, resulting in higher economies of scale.
Furthermore, under differentiation, the company relies on its uniqueness and sells it in the main market. Premium products usually rely on this strategy. They segment the market into segments based on variables such as demographics and psychographics.
They then select viable target segments and develop a marketing mix accordingly. The margin per unit is relatively high because consumers are usually willing to pay higher prices than products on the mass market. The relatively large market size allows companies to achieve higher economies of scale. A good example of this strategy is the iPhone.
Lastly, under a focus strategy, the company targets a relatively narrow niche of potential customers. They may be a small part of the primary market, but with more specific needs. Firms may adopt focused cost leadership or focused differentiation strategies to exploit markets. As for the focused differentiation strategy, iPhone 12 Pro 256GB Gold is a good example, where Apple launched a luxury version of the iPhone to target multiple customers.
Niche market advantages
- Worth it for a small company. Entry requirements are usually low. So, small companies can enter the market, survive, and develop. They avoided pressure from larger, more established companies.
- Lower resource consumption. Production may not rely on expensive machines. To make a unique product, a company may only need craftsmanship and ideas, just like the world’s luxury apparel products.
- High loyalty. Through niche marketing, companies can better satisfy customers, which is useful for building stronger customer relationships. This, in turn, creates high switching costs and inelastic demand.
- Inelastic demand. Customers are less sensitive to price increases. Companies specialize in products to meet and satisfy specific needs. Customers may not get the same satisfaction from other products.
- High-profit margins. Companies often rely on exclusive products to compensate for their small market size. Large companies may also enter this market to create a luxurious image for some of their products.
- Less competition. Big players are usually reluctant to enter niche markets because of lower economies of scale. Thus, the market may have little or no competition.
Niche market disadvantages
- Small market size. Thus, the market offers limited growth potential. When the company has served most of the customers, they must continue to innovate to create demand.
- Low total profit. Indeed, companies earn high-profit margins. However, the small market size means that the sales volume is also low. As a result, the total profit (margin per unit times volume) is also low. Hence, companies must ensure a profitable market to exploit. The market must have enough buyers to make it viable.
- Low entry barriers. Entry requirements into the market are relatively low, so the threat from potential competitors is high. Newcomers can enter and satisfy customers more. To protect businesses, incumbents rely on strong relationships and brand loyalty with existing customers. Companies must continue to adapt to changing customer tastes so they can satisfy them. That is the key to surviving in the market.