Niche Markets for Singapore Entrepreneurs – a new frontier?

As usual, I was invited to listen to postgraduates presenting their business plans yesterday. This time round, a few interesting surprises came up and this provided me to discuss the lessons learned from being a judge to the presentations. One interesting presentation which I heard yesterday is about a product in a niche market. The judges have an interesting discussion about investing in such markets. So, what is a niche market? If you are an entrepreneur in Singapore (where your market is small), is it really worth going into a niche market? We will explore some of these questions in this blog entry.

Due to confidentiality issues, I will not talk about the idea which was presented to me yesterday. The market which the product is touching is in the extreme sports market. Personally, I think that young entrepreneurs in Singapore should not waste time looking at multi-layer marketing or internet marketing (without products) shams. Better still, they should start exploring niche markets.

If you are an entrepreneur, and you did not know about this, some venture capitalists like to invest in a niche market. So, what is a niche market? In short, a niche market is a focused one and presents an opportunity of creating value in the marketplace. Usually, if you specialize in niche markets, your customers don’t come from the common populace. For example, a normal plasma Samsung TV is not a niche market product, whereas a pioneer TV studio (comprising of the video and the sound system and the price is extremely expensive) is a niche product. In the women’s market, this is extremely evident particularly in the high-end cosmetics or skin care products. I was once invited to a party that caters to high-end products for business people and that includes computers, cars and personal jets in the exhibition. So, niche markets will tend to attract people of a high income group.

Here are a few essential features of a niche market which clearly separates it from smart business innovations like YouTube or iPod:

1. Potential demand for a specialized product/service but no supply: Niche market companies usually have a product or service that is not being addressed by mainstream providers. It usually emerges from a market niche where the potential demand is not met by any supply. If you want a watch which can last for a longer time when you go diving, a Casio watch will not meet your demand. You need specific watches which has properties that a normal watch company don’t do.
2. Target market is small but affluent: In a niche market, the target population is extremely small. Usually, the product targets a specific interest group and in addition, a certain group who have the wealth to purchase these niche products or services from you. Let me use the extreme sports market. Suppose you come up with a mountain-climbing product which enhances the climbers’ performance, you will have to target a very small group of people. The first thing is to rule out that you should do this because it is not sustainable for a business and you earn very little returns. This is where most people stopped when they come up with ideas. The immediate next question that you should always ask when you have a niche product is, “Who are the people buying this product and what kind of income group will they be in?” Using the same example, if you know that the people who tend to do rock climbing are in the income group that investment bankers or management consultants are, then even if the market is small, they are willing to pay the money to buy your niche goods based on the reasons of their affluence and their passion for the sport. Then you are in business. Never take a niche product that has no market in a low income group. That will lead you to extreme disaster.
3. Big boys are not interested in your niche product: If you have a niche product or service, it must also fulfil a criteria which is a double-edged sword to you. For example, high-end skin care products might be not of interest to big companies (for example, L’Oréal) who wants to market their products to the lower and middle income groups. In the old days, Prada bags used to be a niche market product, but now they have entered into the mainstream market. To be successful in the niche market business, you need to have a product which seem to pose no threat to the big boys and subsequently through branding and marketing, you end up cashing into the mainstream market.Niche market products/services are profitable because of two things: (1) lack of interest because of the big players or (2) lack of awareness of small companines. The trick is to capitalize on a niche market and subsequently find or develop a niche that has customers who are accessible, that is growing fast enough, and that is not owned by any established vendor.It is the same reason why some VCs like niche market products and why some don’t. To some VCs, they want the market size to be scalable and hence they prefer protection in their technologies or products. To others, they can place lesser protection in niche products with the knowledge that the big boys are not interested, and then target a specific group of people to buy this product. This is not an easy endeavour and entrepreneurs need to think through the process in how they sell their product. Of course, if you can protect your product, you should do it.
4. Sales are done by specialty shops or in niche exhibitions: Your product is usually marketed in the following channels: (i) special interest groups, (ii) high-end specialty shops and (iii) access to high-end customers. It can be done by word of mouth or viral marketing within a certain circle. Imagine you might have a good skin care niche product and you have access to high earning professionals, that is the kind of sales which you need to do. If your company is expanding well, you can even do franchising or licensing of your product to the big companies. In such markets, you need to establish customer loyalty to protect your markets before other players enter into the scene.
5. Your exit strategy is usually trade sale: Unlike the common products, niche market product companies tend to exit via trade sale to a bigger player. For example, a big MNC who did not have any access to this niche market, might decide to acquire your company to take out a market which they don’t provide.

In truth, it is a new domain which I think most Singaporean or even Asian entrepreneurs are not aware of. While most investors look for mainstream ideas that caters to mass markets, it is also of their interest to explore niche markets as well. So, be on the look out and come out with a revolutionary niche market business.

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