By Brett Ryckman
Which market segment to target? Do you go after “mass” markets, focusing on a broad set of customers, or target “niche markets” — or do both? Software companies creating new products or just starting-up must make these complex and perilous decisions. What must you consider in those decisions? Wikipedia states:
The mass market is a general business term describing the largest group of consumers for a specified industry product. It is the opposite extreme of the term niche market.
A niche market is the subset of the market on which a specific product is focusing; therefore the market niche defines the specific product features aimed at satisfying specific market needs, as well as the price range, production quality and the demographics that it is intended to impact.
Often this is an inherent decision. If your company produces bank security software for ATMs, your market is already well defined. Companies with broader products or aspirations have more of a challenge. For example, if you have a Web CMS product, do you target anyone that needs a Web Site or just attorneys or accountants, then tailor your product for those professions?
The lure of mass market revenues is so great that many software companies cannot resist. Unfortunately, mass-market products typically require vast resources to develop and market.
In The Business of Software, author Michael Cusumano provides an example in recounting the adventures of SkyFire, a maker of wireless networking software. First, several years of development time were required for SkyFire software to work on any type of device and any operating system. Second, the mass market for wireless products was slow to adopt and then still in its infancy. Rather than going after a few niche markets and deliberately growing into the mass market, SkyFire went straight for the masses. The company spent most of its time and resources making the technology suitable for a general-purpose solution. In 2001, the money ran out, and SkyFire closed shop.
Bigger Isn’t Always Better
One thing is certain, niche markets are certainly easier to overcome than mass markets. I think a lot of companies initially lean toward the mass market because of the revenue potential. I often hear comments from executives like, “There are 15 million small businesses out there so if we can just get 1-percent of them, we will be golden.” Well, it is true mass markets have much greater sales potential, but that is counterbalanced by the extensive resource requirements for developing and marketing the solution. (Even if you raised 6 million in VC funds).
Market segment decisions also affect how software companies should price software. Software that is targeted at niche markets tends to be more expensive than software that is targeted at wider audiences. This is partly driven by lower demand, which requires higher pricing. Niche software may be designed and tailored for a particular industry, and therefore not easily replaced by a generic or mass market product, even at a lower price. With larger per sale dollar amounts, the sales cycles are often longer for the niche software vendors, a factor which must considered in revenue forecasting.
It is also not uncommon to have niche providers competing with the mass market vendors. In the CRM software arena large vendors such as Salesforce.com and ZohoCRM are competing in a wide range of industries and niches. For example, niche software vendor Dendrite, which makes CRM software for the pharmaceutical industry, often finds itself competing with the big boys such as Siebel and SAP.
Niche software vendors often look outward in the market to determine what competitors are charging in order to position their own software pricing. This view includes large vendors that have low prices. The niche vendors may think “Hey, Salesforce.com is charging $45 per month, so we need to be at that price point." The failure to see the mass market difference may lead to their downfall.Without sufficient customer volume, the low profit from low prices may result in insolvency.
Large CRM vendors must devote substantial resources into being “all things to all people.” The niche vendor can really develop industry-specific features to meet their customers’ needs, giving them a competitive advantage. Salesforce.com has attempted to hedge that by developing the “App Exchange” which allows companies to develop or install sub-sets of applications tailored for their industry into Salesforce’s application.
Catching the Long Tail
Targeting niche markets is commonly referred to as “Long Tail” marketing. The concept originally debuted in Wired Magazine, in October, 2004 by Chris Anderson. He argued that products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters. His research showed that a significant portion of Amazon.com’s sales come from obscure books that are not available in brick-and-mortar stores.
The same concept of “Long Tail” can be applied to software vendors. Companies can develop long-tails by creating software products that solve specific problems or fill special needs. The historical approach to software is to overdevelop features to address enough customers’ needs so that they sell millions of licenses to the mass market. This trend is dying as more and more niche software vendors enter the market, offering customers a greater selection of specialized products. This is partly due to a significant reduction of the barriers to entry, thanks to Web-based software platforms such as software as a Service (SaaS) and the widespread market acceptance of Web-based software.
Niche Markets Pros and Cons
- Targeting niche markets allows focus and specialization in that sector
- Easier to take a large market share in a niche market
- Typically it is less expensive to develop software targeted to niches
- Easier to market the software in a niche with less competition ñ without having to go up against the large vendors like Microsoft or Seibel.
- Target a niche, exploit the lack of competition, and you can gain a large market share.
- Gaining a large market share makes your company an attractive candidate for acquisition by a larger provider looking to get into that niche market.
- You might put the golden handcuffs on. Once you have established yourself as a niche vendor, it may be difficult to transition into mass markets. Strong brand perceptions are hard to change.
- May limit how big you can grow
- Some niches may require large resources to develop
- May takes significant resources to penetrate a particular niche market
The allure of mass markets may be irresistible, and can lead companies into peril. In reality, start-ups and companies that currently do not have mass-market products should think carefully and cautiously before going there. Research shows that generally a software company is better positioned for success to start in a niche market, prove itself, and grow its way up to the masses.
About the author:
Brett Ryckman is a product developer and entrepreneur. Recently he founded DisputeSuite.com, a software as a service (SaaS) vendor that was acquired less than a year after launch. Prior to launching DisputeSuite, Ryckman worked as a web & UI designer for companies such as Kforce, Verizon, Catalina Marketing, and Perficient. He currently showcases his work at http://www.brettryckman.com.