Finding the Right Market Niche

Every company would like to market its products in the largest possible market niche. So point your products at the largest possible market they can address and charge forward, right?

Wrong.

For nearly every company, some markets are “too large”. How can that be? Isn’t the larger the market, the better?

In a word: “No”. For a company to truly achieve traction and become profitably established, it almost always needs to define a market segment in which it can be a major player, if not dominant. The adage “If we can only get 5% of this huge market, we’ll get rich” just isn’t very accurate. The also-rans, the tertiary players in most markets, usually aren’t even profitable. And they are often just doing their best to stay afloat with their heads above water. All but the largest SaaS and traditionally licensed software companies should consider niche size in the product planning process. And the biggest software companies still need to consider segment size for the opposite reason. They can’t afford to waste resources on products serving segments that won’t move their revenue needle.

So what are the most important things to consider when deciding what market segment(s) to attack with your great new technology? Let’s take a look at a few that jump to mind:

Your Level of Resources

This is the first filter to utilize because of the considerations we discussed above. In many markets, your company just won’t have enough horsepower to rise to the top. Regardless of how great you think your new product idea is. Be realistic about this. Remember, it’s important to define your segmentation in a way that allows you to become a market leader. Trust me on this. It’s far better in the software business to be a big player in a small pond than the opposite.

Take an inventory of your resources. Overall funding, as well as development and marketing/sales, and make a cold-hearted assessment on whether this market segment is a good fit for your company, as currently configured. Maybe it’s the perfect niche for you now. Or possibly, it’s something you should hold off on and keep on your radar, tackling it down the road. Don’t let your “eyes be bigger than your stomach”. Or you may stunt your company’s development by entering a market segment it’s not yet ready to handle.

Segment Competition Level

The second thing I’d look at is the competition level in your target segment. Are there a lot–maybe too many–competitors for the size of the segment? Even if there is enough business to go around, with a lot of competitors, it’s difficult to get attention as a new player in a segment. That’s true even if you don’t consider the competitors all that strong. Are there several strong competitors, with good products and high market share? This presents even a bigger problem for a new entrant.

If both of these situations exist simultaneously, be really careful. In that case, it may be a segment to steer clear of for the time being. It’s critically important not to underestimate the competition. By being first and embedded in the market segment, they have many advantages over you as a new entrant. Don’t be overconfident. Before jumping in, I recommend spending considerable time and effort fully analyzing the existing competitors. Personally, I pick segments (when possible) where I believe I have a clear product advantage of some sort. Or some other major proprietary advantage, before entering a new segment.

Market Niche Experience

Of course, it’s better to choose a market niche where you know the lay of the land and have some existing contacts–than not. Sometimes this can be a little overblown, though. I’ve entered many markets where I previously had no experience or contacts, with great success. And in the software/tech business, things can change very quickly. If you aren’t open to recognizing change, that “existing market knowledge” might already be dated. And that knowledge that gives you so much comfort can actually work against you. IMO, it’s usually far more important to have the ability to go into a market segment and size it up accurately and quickly. More so than having experience there. All things considered, assuming you don’t get over-confident in your market knowledge, having existing contacts and experience in a market segment can be helpful, of course.

Market Niche Maturity

It’s great to have a good understanding of the market size. How long it’s been around as an identifiable segment, as well as the current penetration rate, is also important. This is an attribute that often isn’t adequately considered when segmenting markets for software products. It’s great that the market size is $XXX million or billion. But how much of it is ‘virgin” territory and how much of the market is “replacement”? There are pros and cons of trying to market to each of these customer types. Customers may be easier to identify in replacement segments.

But it’s often much easier to sell into virgin segments once you’ve been able to identify appropriate customers. In general, I greatly prefer virgin territory, especially for relatively young companies. For many reasons, that will need to wait for another article.  The exception is when you have developed a product that is very easily comparable to the products in an existing replacement segment.  BUT FAR SUPERIOR in price/performance. As I stated above, this is a topic that could easily justify a separate article. In any case, it’s one that should receive more consideration than most folks give it.

Is Your Technology Really GREAT?

After all I’ve said above, I’m going to contradict it–a bit. What if you have truly new, breakthrough type of technology? I’m referring to the kind of technology that gives you a 2-year lead in almost any segment that it applies to. If this is the case, it can go a LONG way toward overcoming the things to be careful about that I’ve outlined above. In this circumstance, I tend to be more aggressive when picking segments to enter. Because with a huge product advantage, it gives you an opportunity to defeat larger, more entrenched competitors.

Also, to market more effectively in bigger segments. That’s because in this situation, nearly EVERYTHING works better. Your marketing is much more efficient because you can get a lot of highly effective (and free) PR. There is more word-of-mouth (also free), and so on. In fact, with very strong technology, I want to exploit it in the largest realistic segment as soon as possible. In this case, it’s better to strike fast while you still have a large lead. Before you give those stronger competitors a chance to catch up on the product side. By the time they do, you will have become well-entrenched yourself. The obvious caveat here is to make sure you’re objective and realistic about what you really have on the technology side. If you start believing your own hype, and it’s not real, you’re likely to be smashed like a bug on a windshield.

Summarizing it all

In summary, most companies don’t start with the market stature of Microsoft or Google. They shouldn’t pretend they are. When starting, pick a market niche you think you can dominate. Dominate it, then pick the next (bigger) niche that you feel you can dominate, with your now greater level of resources and brand. Rinse and repeat. Do that long enough, and maybe you WILL someday be picking the largest market segment possible for your products.

That’s what I believe about niche software marketing. What do you think? Please post a comment to fill us in.

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