Start a Niche Advantage

Harley-Davidson-Motorcycle-Dealer-Ad-Vintage-Poster-reprintHere we outline a process for securing a Competitive Advantage (CA) in a niche segment of the market, by marketing assisting strategy with:

1. Identifying a niche segment that offer potential CA sources.
2. Increasing the sales volume in the niche segment to secure initial CA sources, and
3. Propelling the CA reinforcing loop for market share gains.

CA niche reiforcing loop


1. Identifying a niche segment that offers CA sources.
The aim is to find a market segment of customer needs that has the right features and characteristics in place as to encourage a CA reinforcing loop to take effect (to one company’s benefit).
To find a niche segment with the potential to gain a CA, look for:

A. The customer segment to be structurally different from the rest of the market causing their needs to fundamentally differ, and
B. CA sources identifiable with that niche segment because of its structural difference, and
C. No rival specialising in serving the segment, nor a clear sales volume leader.

A. Customer segment with a structural difference compared to the rest of the market causing their needs to fundamentally differ.
Here are some suggestions to find a segment of customers whose needs significantly differ from the rest of the market:

• Different by Where purchase? A segment buying at a specific moment in their lives through a unique distribution channel different to the rest of the market. Or a segment located geographically differently to the rest of the market.
• Different by When purchase? A segment whose buyer’s activities before or after purchasing differ to the rest of the market.
• Different by Who purchase? A segment whose buyer is heavily influenced by a second decision maker unique to that segment and not featured in the rest of the market.
• Different by Why purchase? A segment’s usage of the product is for a different larger overall purpose, compared to those of the rest of the product market.

These segmentation variables represent underlying structural aspects to a potential target customer group that cause some of their needs to significantly contrast from the rest of the market.    These variables differ from traditional marketing segmentation:

Niche CA not marketing segmentation


B. CA sources identifiable to that niche segment because of its structural difference.
The cause for the segment’s needs to be so fundamentally different will point to which CA type that initial CA sources may be found under:

o If the segment consumes the product via a different distribution channel = toll distribution access.
o If the segments’ overall usage purpose differs to the majority = learning curve and scale economies.
o If the segment has a need for company fixed assets to be far closer to their product or service purchasing relative to the overall market, or the assets can meet their needs despite being geographically far away = scale and scope economies.
o If customers within the segment can benefit from interacting with each other on their uniquely different need to the rest of the market = network effect.

To combine A. the Structural difference to a segment that affects its need with B. identifiable CA sources, the more different in needs to the rest of the market, the more:

• Fixed assets (a fixed cost) required to serve the segment that are specific only to them (‘asset specificity’)- leading to Economies of Scale and Scope CA sources,
• Headroom for learning their unique needs- leading to Learning Curve CA sources.
• Opportunity for owning a unique downstream distribution channel and upstream supply access to raw material specifically for them- leading to Toll Distribution CA sources.
• Opportunity for each customer to benefit from interacting with each other as more subscribe to that product, due to sharing similar needs between and such different needs to the majority- leading to Network effect CA source.
• Switching costs as a result of the above earlier CA sources.

 Learning curve image 1Network effect image 1Scope economies product portfoliotoll bridge distributionswitching costscale economies cementsilos_big8


C. No rival specialising in serving the segment, nor a clear sales volume leader.
A segment that offers CA sources and therefore a potential to grow shareholder value is an attractive target.    However, it is of little value if a rival has pre-empted the opportunity and secured the CA sources already.

Two factors indicate the probability that any CA sources have already been secured:  a rival solely specialising in serving that heterogeneous segment or a clear dominant sales volume leader over #2 and #3.

Niche Ca any rivals preempted the niche opportunity


2. Increasing the sales volume in the niche segment to secure initial CA sources.
Having identified a niche segment that meets all 3 criteria above, sales volume can be increased by:

A. Customer research into the under-served needs of the niche.
A niche segment of customers with different needs to the broader market, yet with no company specialising in serving them or dominating sales in that segment, is likely to be a segment with under-served, unmet needs and desires.

This offers scope for developing a product proposition that is differentiated to the rest of the market. The research’s aim is therefore to develop a superior understanding of the unmet needs of that segment beyond that of rivals; a temporary information advantage over rivals.

B. Applying the customer research into adapting the company to that niche.
To convert the customer research advantage into a materially better fitting proposition over rivals, the insight should enable the whole marketing mix to be adapted to the target niche (i.e. the product, process, people, pricing, promotion and distribution).     Beyond minor tailoring of the product and promotion alone.

It will be unclear to rivals as to how the whole of the marketing mix is fitted together and aligned to an unknown target.   However this is only temporarily superior customer value, for without a CA or strength underpinning,  rivals can soon imitate any success.

Therefore, since CA sources were identifiable in targeting the niche segment, the extent of adaptation should go beyond tailoring a marketing mix to the needs and into investing in securing the identified CA source(s) too.

Securing a CA source amounts to ‘deep adapting’ of the business’ value chain process.    The combined result is materially superior customer value over rivals who are serving both that segment and other segments with broadly similar, less well-fitting propositions.


3. Propelling the CA reinforcing loop for market share gains.
The whole of marketing mix adaptation and CA source investment in serving the target niche means that for the first time the customer segment are truly having their needs addressed.      This improvement in customer value increases sales penetration and initiates the reinforcing loop:

Reinforcing loopA minor increase in sales within a niche segment can quickly translate into a dominant market share % over the second largest rival in the segment.    The result is that subsequent CA sources should be secured far quicker than in targeting a broad segment.

The reason behind this faster domination is because the factors listed under broad advantage as being required to start a CA reinforcing loop- the target’s fundamental need differing from the rest of the market, few alternatives available to serve the target, few rivals – are magnified in a niche sector.

The following example demonstrates how a niche segment’s variety of  CA sources can cascade in a company’s favour within a short period of time:

1. Initially adapting a marketing mix to the segment and recruiting one technical expert as a job specialisation CA source (learning curve CA type) to develop a product/ service solely for that niche,
2. The result is an increase in sales, which enables fixed cost advertising to that segment to be economically viable for the first time, given the sufficient sales volume minimising its cost impact per unit sold  (scale economy),
3. The advertising heightens the product’s perceived utility and reach, leading to more sales that enable experience curve cost savings in developing and delivering the new-to-market product, enabling a lowering of price to drive sales (learning curve and scale economy),
4. The further sales growth makes additional fixed cost market research feasible, to better understand the segment’s needs to gain an information advantage over rivals (scale economy and learning curve),
5. This market research insight can be translated into adding a second product for the segment (in conjunction with the recruited technical specialist above), the second product out-focussing and squeezing out remaining rival positions (scope economy),
6. And then leveraging the minor product range and brand awareness to tie up exclusive distribution rights with the need segment’s preferred channel (toll distribution, aiding further scale economies).

A company can quickly gain volume leadership of a niche customer segment as a result of securing all available CA sources that were identified in part 1 above.   Additional to these CA sources are the cost efficiencies from adapting a business unit to solely serving that niche and removing all non-value activities.

Combined with the segment’s inherent customer need stability over the years as a result of the customer’s structural difference to the rest of the market, then the CA’s RoIC % spread sustained over multiple years can materially grow shareholder value.


If a niche competitive advantage is not feasible, then sustain shareholder value.
However there may be no opportunities available to secure a niche segment CA.     The market may lack sufficiently different needs from the overall market as to require segment-specific assets or processes or market access positions as CA sources to better meet their needs.    Or the potential niche segments may already have been pre-empted and occupied by rivals.

If neither a broad nor niche segment of the market can be found to offer CA sources that a company can pre-empt, secure and dominate with, then no strategy can be formulated to secure a CA.     Therefore the next best alternative move for a company lacking a CA is to sustain shareholder value and wait for a future disruptive market change to offer a CA opportunity.