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Aspiring entrepreneurs often test the validity of their business ideas by asking themselves a number of questions. One of the most popular is “Does the idea target a niche market?” This question is essentially asking if the business’s target market fulfills three qualities: large in size, substantially specific, and untapped, or yet to be effectively targeted. Many experienced entrepreneurs would likely argue that a niche market is a mandatory requirement for success.

Some of the biggest businesses in the world are rooted in niche markets. Yes, their markets expanded significantly as the business grew. But in their infancy, everyone from Starbucks to Amazon to Airbnb catered to markets that were large enough to be profitable but not so large that the business could not stand out. And their markets didn’t grow because the business changed. They grew because just as the entrepreneurs predicted, demand was already shifting in this direction.

Without a niche market, you will face several major challenges. First is the tremendous of competition targeting the exact same audience as you. The mass of your audience will make it extremely difficult to tailor your branding and marketing efforts to their preferences. In other words, there won’t be anything specific about your audience that you can use to connect with them. When you try to please so many different types of people, you’ll likely end up pleasing none of them.

A niche market, however, allows you to essentially skip these challenges. You’re not worried about alienating people because your research indicates that your market is headed for growth. By that time, no one will know how to address your audience’s needs as well as you.

In this guide, we’ll explain what niche marketing means and show you how to identify a niche market for your business.

What Is a Niche Market?

Businesses with niche markets target subsets of larger markets. In most cases, the subset differs the larger market through at least two of five market segments. Those segments are: geographic, demographic, firmographic, behavioral, and psychographic.

Geographic segmentation creates a market based on the audience’s geographical boundaries. It assumes that people who live in a certain location have certain purchase preferences. Demographic segmentation creates a market from general demographic information, like the audience’s age, gender, average income, ethnicity, marital status, etc.

The “firm” in firmographic segmentation stems from the decision to serve a specific type of firm, or business. Thus, B2B businesses often consider firmographics when choosing the size or annual revenue of the businesses they wish to serve. But firmographic segmentation can also mean catering to members of a specific industry.

Psychographic segmentation creates a market by catering to an audience with a certain need, value, or interest. Behavioral segmentation creates a market by catering to proven behavioral tendencies of the audience. This could refer to the way your audience uses something (dressing up a dog, decorating their smartphones) or how frequently they prefer to use certain products.

Combine Segmentations To Create A Niche Market

All five segmentations present ways to narrow down your target audience from a much larger group. That larger group could be something very broad like dog owners, or something slightly smaller, like professional musicians. Let’s say your business caters to New York City-based professional musicians who are looking for digital marketing services. In this case, your business would create a niche market by combining firmographic (professional musicians), psychographic (in need of digital marketing services) and geographic (based in New York City).

This example also proves that niche markets don’t have to revolve around completely new products or services. In fact, they can be fairly broad, like swimwear or party planning. Your business is just creating a version of these products or services that caters to a more specific and largely untapped audience. Their specific features, price, quality, etc. will differ from the competition.

New businesses are usually encouraged to take a large audience and narrow it down as much as possible without seriously compromising the size. If you don’t think your business idea is specific enough, apply another segmentation. For example, a new law firm that specializes in workers compensation could apply geographic segmentation to focus on a specific area, or firmographic segmentation to focus on a specific occupation that is known for workers compensation-related issues. As the firm builds success, it will acquire more resources that are necessary for taking on higher levels of competition. At that point, the firm can broaden its audience.

Top Benefits of a Niche Market

The benefits of having a niche market are simply too advantageous to dismiss, especially from a marketing and financial perspective. Here are just a few benefits of catering to a smaller group of people in general:

Lower Costs

The process of finding a niche market can certainly be viewed as a wise investment. You spend a modest amount of time and money conducting research and experimenting with potential strategies. The payoff is the massive amount of both resources you’ll save once you’ve found your market. Compared to a broader audience, it costs significantly less time and money to develop products and services for niche markets. The same concept applies to marketing for niche markets and delivering quality customer service. But remember, you won’t get any of these rewards unless you invest the proper amount of time and money in ascertaining that your niche market exists and is headed for growth.

Less Competition

Earlier, we mentioned that a key element of a niche market is that it has gone ignored by the rest of your industry thus far. You have little (if any) competition when it comes to the specific need you’re trying to address. No one else is trying to market similar products or services, or deliver them at a faster rate. With a broader audience, on the other hand, you’d face the daunting task of competing with larger businesses that can offer lower prices, better convenience, and reach many more potential customers with their high-budget marketing tactics.

If your niche market, however, turns out to be just as big as you anticipated, competition will naturally emerge. If there’s no competition, your market might actually be smaller or less lucrative than you anticipated. We’ll explain how to avoid this scenario later on.

Better Customer Service

New businesses gain traction by establishing and maintaining a loyal customer base. Their first batch of customers are essentially treated like gold, which increases the likelihood of the almighty referral. Since niche markets are smaller groups of people, you can devote more attention to your initial customer base. Your customer experience and engagement methods can also be tailored to your audience’s unique preferences, which is another key element of niche markets.

More Accessibility

The importance of digital marketing has made niche markets even more desirable. Search engine optimization, for example, refers to your business’s accessibility through a Google search. If you cater to a more specific audience, that audience is going to use specific keywords when searching for your products or services. You won’t have to worry about too many other businesses competing for those same keywords. This is the primary goal of virtually every search engine marketing strategy: to ensure that your business shows up for the right searches, as opposed to as many searches as possible. You can double down on your most relevant keywords by publishing blog content that caters to your audience.

Everyone Reacts the Same Way to Marketing Strategies

Individual members of a niche market are typically very similar to each other. Thus, it’s unlikely that your marketing strategies will only resonate with a portion of your customer base. Instead, the overwhelming majority of your base will likely react the same way to your strategies, whether they like them or not. In the case of the latter outcome, at least you’ll know it immediately. You won’t have to continue testing the campaign to confirm your initial findings, or conduct research to find out why certain members of your audience did not respond well.

This is yet another reason why niche marketing is so much cheaper than a broader audience.

More Opportunities for Referrals

Think about your friends’ purchase preferences or hobbies. Fairly similar to your own, right? Members of niche markets tend to know other people with similar needs. And up until now, no other company has fulfilled this need. In other words, your business’s arrival will become a hot topic of discussion within your audience. Every business strives for this goal. With the right niche market, you can achieve it solely by continuing to serve your customers.

You Can Find Your Expertise Early On

Successful entrepreneurs often preach about the importance of becoming an expert at one thing, instead of becoming pretty good at a few things. A niche market puts you on this path from day one, and customers usually prefer reputable specialists. Let’s say you’re looking for a new BMW. Would you rather go to a BMW dealership, or one of those huge dealerships that sells all sorts of cars?

Remember: If several other businesses could already call themselves experts at what you do, this wouldn’t be a niche market in the first place. By definition, serving a niche market gives you the exclusive ability to market yourself as the sole expert.

Early Sales are Nearly Guaranteed

Niche markets are not confirmed through brainstorming sessions. They require extensive research to prove that not only is there a need for your product or service, but that people will actually pay for it as well. This research nearly guarantees that you will make sales shortly after opening up shop. It’s up to you to build momentum from these sales and learn from your initial customers so you can improve your marketing and customer experience efforts moving forward.

How to Find Your Niche Market

As you can see, the benefits of a niche market are both great in number and extremely valuable. This suggests that the process of actually finding a niche market is long and/or difficult. But like business growth in general, the amount of time it takes to find a niche market varies from business to business. Some entrepreneurs have to devote considerable time and money into solidifying their niche market. Others may be more sure of their ideas from the get-go.

Either way, the process of finding a niche market is basically identical to the process of coming up with a great idea for a new business. Here’s where to start:

What are You Passionate About?

Entrepreneurs do not necessarily have to be passionate about their business ideas in order to achieve success. Plenty of successful businesses were launched solely because the entrepreneur identified a massive opportunity that had yet to be capitalized on. With niche markets, however, being passionate about your idea is especially advantageous.

Businesses that cater to niche markets usually provide very specific products or services to a very specific type of person. As a result, they spend a great deal of time enveloping themselves within a very specific culture. If you cannot relate to this culture, you’ll feel uncomfortably out of place and will not be able to perform to the best of your ability.

Another reason passion is so crucial for niche markets is the adversity you’ll face early on. Regardless of their target audience, virtually all new businesses struggle to gain traction. The early stages of a business that caters to a niche market may be particularly turbulent. Their audience is on the smaller side, and the business is essentially trying to do something that hasn’t been done before. Despite their highly targeted goals, it may take a few tries to hit that target. When adversity strikes, your personal connection to your audience and your desire to serve them will carry you forward.

Lastly, today’s young adults can tell when a business is being genuine or wearing a disguise. If you pretend to be someone you’re not, your audience will likely sense it. Niche markets revolve around connecting with a specific audience, and making it clear that you’re not just in it for the money. This is much easier to do if serving your audience is a personal goal.

Gauge Competition for Search Terms

Next, you must determine if your niche market is large enough to warrant the launch of your business. You can start your research by searching the Internet and social media for keywords related to your products or services. Tools like Google AdWords and Google Trends can help you figure out exactly how much traffic is currently surrounding these keywords.

In addition to search volume, Google AdWords can reveal how competitive your keywords are. This represents the value of these keywords are to other businesses. If your most relevant keywords are highly valued, it’s because they are highly relevant to other businesses that bid on them in Google AdWords. Niche markets cannot be too large. If there is more competition than you expected, your market might not be “niche” at all.

On the other hand, you don’t want your keywords to have too little search volume. This suggests that there isn’t enough demand to support your business. A keyword is usually considered “low volume” when it has under 500 searchers per month.

Ideally, your most relevant keywords should have at least 1,000 searches per month, but not much more than 2,000. Keywords with this search volume have substantial traffic but are not competitive enough that you can’t afford to bid on them. If you’re still unsure about demand for your product or service, you can test it without spending too much money on keywords.

To solidify demand even further, don’t hesitate to directly contact people who fit your target audience. Sometimes, asking questions can reveal important information you would have never obtained through statistical research.

Determine If You Can Draw a Profit

At this point, you should have confirmed that your target audience is indeed large enough to support your business. The fact that your audience exists, however, doesn’t automatically mean that you can draw a profit from your product or service. You can begin this phase of your research by examining how similar products have performed on popular retail sites like Amazon. Then, check affiliate marketplace product lists like ClickBank to see the market value of these products.

If you’re still unsure about how to price your offerings, you might consider testing your ideas through low-cost digital marketing campaigns. For just a few hundred dollars, you could launch a targeted social media campaign that advertises different prices in each post. You might assume that the lowest price would garner the most engagement. But low prices could also signify low value, and you shouldn’t have to set your prices too low in the first place because of the lack of competition.

Test Your Marketing Materials

Now that you’ve figured out how to price your product or service, you can focus on how to tailor your marketing in general. Since you’re targeting a niche market, this phase shouldn’t take too long. The majority of your audience shares the same preferences, so you won’t have to test out too many versions of your advertisements.

New businesses often begin marketing themselves on social media, especially those with niche markets. You have the option to target very specific audiences and test out different ad iterations, a.k.a. the frequencies in which your ads appear. This is another difficult balance that niche marketers have to strike. Your ads must appear frequently enough for the user to remember your business, but not to the point where the user chooses to stop seeing your ads altogether. It’s easy to fall into the latter scenario because users typically have to see an ad multiple times before making a purchase. But since your audience thinks alike, the ad iteration that proves successful for your first batch of customers will likely achieve the same results for all other customers that follow.

Niche Marketing: The Ultimate Goal

Niche marketers often strive to reach a status of popularity known as brand saturation. This refers to the point in which your entire audience (everyone who has a need for your product or service) knows about your business. Unless you’re one of the biggest businesses in the world, brand saturation is only a distinct possibility with a niche market.

We’ve repeatedly emphasized that the size of your audience should make it much easier to figure out what every member of that audience has in common. With niche marketing, your success is directly linked to the number of similarities you find.

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