Dominate a Niche
Entrepreneur – Solopreneur – Multipreneur
As the era of cheap and easy money ends, and economic turbulence seems likely to continue, the Entrepreneurship Era is evolving.
For those without massive bankrolls or VC Dollars, it is important to maximize the odds of success at the earliest stages, and that’s why ‘finding a niche’ and trying to dominate it is the most common and likely effective strategy.
There are various points of research and strategy to support this direction, but principally it involves:
- researching under-exploited opportunities in the market and building a webpage or basic prototype to test demand
- using keyword research and other strategy signals to understand how the market is searching for solutions relative to the problem
- write compelling copy, test out different homepage designs, attempt to persuade and expand the net of serviceable customers as cheaply as possible
- jump on upcoming video trends (UGC Videos, Live Shopping) relative to social commerce and try and increase the likelihood of word-of-mouth virality while certain opportunities fly beneath the radar
The main tenet of dominating a niche is not that it stays a niche (all big opportunities start as a niche), but that it remains too small and uninteresting for major players to invest resources into.
Thus, the opportunity is maximized relative to the time and capital required to try and exploit it.
For many, these types of endeavors start as a ‘side hustle,’ yet the school of thought surrounding exploration and expansion of certain niches is increasingly becoming mainstream in entrepreneurship.
Assessing the Opportunity
In relation to the above – researching under-exploited opportunities, keyword research, testing a homepage, social commerce – there are ways to assess the opportunity from a market perspective.
Market Size Estimates
The most obvious way is to assess the size of any potential market is to search <market size x> and in most cases the results will be returned as:
- a TAM (Total Addressable Market) size that is somewhere in the $Millions or $Billions
- a CAGR (Cumulative Annual Growth Rate) % that outlines how fast the market is growing in general
A ‘niche’ is likely to be a combination of:
- of an obscure market that doesn’t show up on most <market size x> reports; or if it does, then it won’t be an obvious part of the core of the report, but a subtopic
- a market that may be considered small or relatively unknown, but with a very high current (or potential) CAGR
Given the combo of (1) obscure and (2) high CAGR, there are ways to assess whether an opportunity is truly worthy of attacking or not.
Topical keyword searches on more niche networks like Reddit, Quora, or certain Discord communities can unlock insights about new ‘trends’ relative to a market.
Typically, if there is strong momentum in a really small, but fiercely loyal group of customers, then that is a positive signal.
Extrapolating the Opportunity
If there is a strong demand for a strong product within a small segment of 100 people, then that opportunity can be extrapolated to see what it would look like if there were 1,000 people interested in it, then 10,000 etc.
An opportunity to grow a market from let’s say the 100s up to the 10,000s would be compelling enough for many to get started on attacking it. If it is from 100 to only 1,000, then it would depend on other factors discussed below.
Assessing the Competition
Rule of thumb is that the bigger and more lucrative a market is, the higher the competition will be. Further to that, research has shown that CAC (Customer Acquisition Costs) will increase materially as competition increases.
In looking to ‘dominate a niche,’ it is essential to be one of the top players in that niche as indicated by “dominate.”
Assessing competition in a niche can be difficult, but there are a few simple acid tests to get a feel for the level of current or future competition in a niche:
- a quick Google search to see what company websites popup relative to a certain term
- keyword research relative to the overall market
- reaching out to consumers or companies in that niche, a process consistent with the Customer Development framework
Global vs. National vs. Local Demand
Further to this, there will always be a discrepancy in who is either a) capable or b) aware of demand at a global or national or local level.
<x product> search results may show up with tonnes of results based on national-level indexing, but a search of <x product> <y locale> may show almost nothing, illustrating an opportunity.
Often times, some of the top ‘niche opportunities’ come from products or services where demand is established in larger markets first, and then brought down to the local level. Often times major players will not bother touching those smaller markets, opting to instead acquire companies that can service them in the future.
Assessing the Margins
After looking at demand and competition, the major questions will be about the gross margins and profit margins (or net margins) associated with a certain product or service.
Services are usually very high margin – especially as a freelancer – but not scalable, typically leading to an agency model.
Products have a huge variance. If we look at eCommerce sectors that are hot right now, like beauty and health supplements, these products typically carry a gross margin of 70 – 80% or higher.
The excess ‘contribution’ of gross profit then flows down to enable the company to pay for functions like customer acquisition, staff, space, logistics, etc. From there a net profit will be calculated, but in sectors like eCommerce the actual net margins in the end can be quite small, which is why they require high volumes.
This means that if a business model requires high volume but has a relatively small demand ceiling, it likely won’t work. There needs to be both enough margin to turn a profit on a per customer basis, and enough mid to long-term demand to enable the business to generate a worthwhile enough net profit given the risks of attacking the opportunity.
Modelling the Cashflow
Cashflow is king when looking to dominate a niche, not profitability. The term ‘ramen profitability’ refers to making enough net profit in a month to pay rent and food (ramen noodles).
This type of ramen profitability can serve as an initial goal, but is only achievable after some cashflow is being generated through product/service sales, which takes time.
Using the customer development framework, we can see that within the ‘Customer Discovery’ process lies the opportunity to effectively ‘test’ various strategies that determine margin such as pricing, business model, value proposition, etc.
From there, we can see the that it goes to the Customer Validation process whereby a handful of customers can become tens and even hundreds. At this point, the business may require or even seek outside capital. Prior to this point, however, most projections are educated guesses at best.
Thus, through the process of assessing the margins and gauging the profit potential as a whole, it is important to have a view on cashflow and ensure that there are adequate buffers in place to prepare for any uncertainty that may lay ahead.
Rule of thumb is that it always takes much longer than we originally think to profit from an opportunity, but the rewards are dramatically higher than what we could of imagined if successful. Risk is almost always very asymmetric in any entrepreneurial opportunity.