You hear the words all of the time…” the riches are in the niches” and this is a famous term used in marketing circles to talk about providing a service or product that is essential or desired — just take a quick look at this article to get a fuller explanation.
In the world of business mentoring and other advisory services, you will often hear mentors and coaches almost pleading with their clients to “niche down” and focus intently on one area of specialization and to have the opportunity of becoming a “big fish” in a small pond!
It’s good advice at face value…but is it the right advice?
Here are 3 key issues to consider:
Niches work…until they don’t.
“Niching down” allows you to become a big fish in a small pond…until it doesn’t.
Starting a business in a laser-focused niche is great if you are looking for a lucrative exit strategy…until your niche goes out of fashion or you face a market downturn.
I was speaking to Richard Branson at an awards dinner many years ago and when my own recruitment business niche was going into a serious recession — I operated a telecommunications business that was focussed on dealing with the worlds largest operating, manufacturing, and consulting companies, providing them with specialist engineering consulting services.
He explained to me that I should diversify and looking at his own business history, you can see how he started with one niche and then expanded into several other sectors.
In the late 1990s, my industry had hit its peak and the bubble was about to burst, leaving the industry on its knees and taking many casualties.
My once top-tier clients, who had been my gateway to success — were now laying off up to 50% of their global workforce, and cutting costs was now an obsession.
For us mere mortal suppliers, we were facing business and financial ruin and I could only look around with envy, to the recruiting companies who had a diverse client base and protection from exactly what I was going through at the time.
I had certainly “niched down” and “owned” my own sector of the industry and it allowed me to have the fastest growing business in the UK, for a record two years in a row, for the prestigious Virgin Atlantic/Sunday Times Fast Track 100 competition, as it was known back then…hence my conversation with Mr.Branson.
I had built a substantial business, with excellent revenues and profits, within a niche, and yet I was now facing obliteration.
It was only my experience of surviving a previous recession and my own “never quit” attitude that got me through and with an exceptional team of colleagues and advisors.
So what went wrong?
Why operate in a niche?
If you think about it, then every business operates in a niche — in my own example, I operated in the business services sector of staffing/recruiting and then specialized by providing specialist engineers in the telecommunications niche.
I could have gone broader with using the term “technology,” and I could have operated across other sectors of the telecommunications industry by working with people outside of the engineering sector, such as sales, finance, administration, etc.
But I wanted to offer a dedicated, high-quality service to a specific group of people, that would allow me to laser-focus my sales and marketing efforts and get right under the skin of my target clients.
You see, I knew everything about my target clients and that came from conducting deep research — I not only knew the problems and challenges they faced at the time but was able to predict those they would face in the future.
I made sure that I was connected to the top executive layers of my targeted companies so that I was working with the real decision-makers.
I then further niched my services by focusing on interim or contract engineering staff because it gave me a more consistent and predictable revenue stream and I had an opinion that the industry would become dependent on this type of worker due to the then looming global de-regulation of the telecommunications industry.
Everything was set up as perfectly as it could have been…in my view at least!
And this is why operating in a niche is a very good business decision to take…but there are risks that come with it.
When operating in a niche goes wrong
When things went wrong in my niche, they went very wrong and very suddenly.
Everything came at me at warp speed and from jetting around the world, meeting and selling to customers at the highest level, opening offices to meet my newly created opportunities, I was now having to sell to my finance provider, various landlords and manage the cash flow to keep as many of my employees as I could.
Many of my fellow entrepreneurs and business colleagues told me that winning awards is the kiss of death for companies and these weren’t the ones saying it out of jealousy and they were very nearly correct.
When I was sitting at the awards dinner table at the time, very few people knew the seriousness of the situation I was in with regard to my company.
I had just re-furbished my office in London and signed a ten-year, million-dollar lease in Dallas, Texas, which was to serve as our new global headquarters.
The US telecom industry was advancing faster than Europe at the time and did not have the burden of debt that came with operators having to pay what you could term as extortionate licensing fees just to operate the new third-generation mobile technology.
And after paying the license fee, they had to then build the network!
With the burst of the tech bubble, I was now seeing revenues evaporate and the only other businesses I had as far as being diversified was concerned, was another specialist software company…operating in a very narrow niche and in the telecom industry, plus a restaurant that was consumed with staffing problems and one that I thought could run without me.
It was a big mistake and one that would see me shut the restaurant down and focus all of my efforts on the telecom businesses.
But I also had the problem of a finance provider who was becoming increasingly nervous about our customer debt and the industry as a whole.
Luckily, I had not blown the personal wealth that I had accumulated over the previous years, and I had been through a previous recession, I was very cautious as to how much money I would use to keep my company afloat, as I have seen too many entrepreneurs make a ton of cash and then when times are tough, they would put it all back into the business, only to lose it all.
Also, I had no personal guarantees…but the company had guaranteed the lease in the US.
You get the picture!
The words from Branson were now resonating with me daily.
I had actually planned to diversify operations to cover other vertical markets and build a nice recruiting empire, but that was now far removed from the daily reality of survival, but as they say, “the show must go on” and I had to work with what I had and do the best I could.
I survived, but many didn’t.
How to protect yourself
There are 3 key points that I would like to get across to entrepreneurs about working in a niche:
- Make sure you do your research and keep that research up-to-date — you must make sure there is “room” to grow in your niche and that you can build a sustainable profit stream to allow you to exit quickly, or re-invest to develop new markets.
- Never get “married” to your business or your ideas — invest in the right coaches, mentor, advisors, friends, relatives, and whatever to make sure you have an outside perspective. I was married to many of my ideas and businesses which in hindsight, hindered my progress and allowed me to persist with strategies that would have never worked.
- You should always look to build a niche to exit and whether you do so, is irrelevant. By making sure your sales and marketing efforts are disruptive, your systems and processes are pristine and ensuring you make solid profits, you will generate attention, plus you will be able to use those profits to diversify if needed. You should also ensure that you are disciplined when it comes to taking a salary, taking profits, and to run the business as efficiently as possible.
If you conduct the right research you will be better able to predict the “sweet spot” in the market.
Think like a savvy investor who is looking to grow their wealth — they will spread their investments over multiple sectors and asset classes.
They may invest heavily in one particular investment niche, but they will always have a back-up investment plan to cover any eventuality.
It is too tempting for us entrepreneurs to go “all-in” and I talk from experience here…while it can be exciting to rapidly disrupt and dominate a market, you are also increasing risk.
Entrepreneurs are always trying to balance natural instinct with clinical decision-making.
If I was to start a niche business again and assuming that I had done my research correctly, I would build it immediately for an exit — it’s not that I would shout and scream to everyone that I am building it to make a fortune, but I would make sure I made it attractive for anyone who maybe one day, would consider purchasing a business in my niche.
By doing this you force yourself to make everything “better” and focus on keeping things lean.
You should also look to build a “war chest” when you are enjoying profitable times, to make sure you can fight through tough times and also to be able to invest in other opportunities.
It’s a fine balancing act.
I love niche companies because it is easy to see what they do, who they serve, and if you are an investor, you have the potential to enjoy spectacular growth…but you can also lose your shirt very quickly if things go wrong.
Rarely is there any middle ground and that’s why savvy investors spread their risk across different industries and investment asset categories.
If you are going to operate a business in a niche, it is imperative that you conduct deep and consistent research — you want to make sure that you have room to grow in your industry as well as be able to survive an economic downturn.
But on the positive side, if you get the research and timing right, you can enjoy the fruits of your hard labor with a lucrative exit.
I should have steadily diversified my specialist recruiting company over the early years and protected myself during the technology recession that I had to work through — it totally depleted my energy and financial levels.
Finally, try to balance your innate entrepreneurial spirit, with clinical decision making.
You will not regret it!
Please feel free to contact me if you would like to talk further on this subject and share this article if you feel it’s been helpful.
Last modified: October 16, 2020