Profitable Niches

As of late, I have been speaking with management of many different companies. Oftentimes I’m asked for my recommendations in these engagements and I have noticed a certain theme that remains constant in my answer. That theme is to focus on profitable niches.

Way too many companies, in their internal strategic planning, make the mistake of doing zero sum game analysis. Having done a review of these analysis for Fortune 500 companies, it becomes clear that many bring an old world view to the competitive landscape. What I mean by “old world” is the thinking that, for someone to win, others have to lose. This may have been true at a time when the industry was small and the total addressable market of computing products was less than 500 million. It was in this environment Microsoft ruled computing and Apple was nearly bankrupt. Not long after that narrative, another emerged, also including Microsoft, with Internet Explorer vs Netscape. The online population was also only in the hundred millions and the narrative was only one of these browsers could win. Eventually, Internet Explorer did. The same was true when Palm entered the scene. Against Microsoft’s Pocket PC platform, most analysis looked at this as a zero sum game in a winner-take-all market. That world is gone and has been for some time. In a world being drive by computing’s S-Curve (pictured below), there is market share to go around.

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Market Share vs. Market Shares

“Enough market share to go around” seems to be lost on many companies. Which is why I hammer home the theme of profitable niches as a sustainable business in such a large market. Perhaps the best modern day example is Nvidia. A company thriving by continuing to advance high end gaming graphics cards with incredible margins. They sell these to an enthusiast market which, while small, spends a tremendous amount of money. Gamers are a profitable niche. In fact, you could probably argue any enthusiast market is a profitable niche. Every market has these. In the automobile world, there are cars designed specifically for car enthusiasts. In the consumer packaged goods space, health enthusiasts enable premium prices for more quality food and goods. Fashion, jewelry, and more all have their commodity products but these markets also have profitable niches.

In essence, this is what Blackberry is hoping to accomplish with their Passport. They hope there is a business “enthusiast” who values the hardware, software, and services they create and are willing to pay more for them. If successful, Blackberry will have found a profitable niche.

While it is hard to predict which niches will be profitable, I do believe the computing markets globally will continue to splinter. As the broader commodity smartphone, tablet, and PC categories grow, there will be some splintering off to these profitable niches. Nvidia again has a great example with their Shield gaming tablet. Nvidia knows the makeup of core PC gamers and built them a tablet to compliment and extent their PC gaming experience. Kids’ tablets are another great example. Nabi is moving millions of these products at decent margins by focusing on parents but delivering a kid-friendly tablet solution. Ruggedized PCs, tablets, and smartphones are profitable niches. GoPro is another great example of a profitable niche. There are already many examples and more will come.

The key is to be looking out for them or being an innovator and creating them. As computing grows, so will a large base of those underserved by commodity computing products and looking for things more reflective of their unique needs, wants, and desires. This will be true of everything around hardware, software, and services. Some profitable niches will be bigger than others in terms of their slice of the pie. However, these profitable niches are in essence zero sum games. These are the areas where first mover advantage is real and apparent. So the key to is see them early or create them.

Know your customers, and look to fill an underserved need in the market and the profitable niche will emerge.