How to know if the customer niche you’ve chosen is too small?
The following answers are provided by members of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
1. Start Super Niche and Grow
Your business journey should begin at the intersection of your own passion and market opportunity. Use metrics to identify the opportunity that exists by identifying disruption-centric industries or technologies within industries that are growing rapidly (e.g., e-commerce or virtual reality). Start with that pinpoint accuracy, and then expand your offering steadily as you grow.
2. Check the Competition
The focus of the companies in this niche will tell you a lot about its quality. Do these companies offer just this service? Or, is it only ever offered in combination with other services? If it’s the second one, there’s probably not enough demand in that niche to keep a business alive.
3. Focus on Your Customers, Not TAM
There is no such thing as a market that is too small when you’re starting your business. Focus on delivering exceptional value to a small group of users, and grow from there. You can go into adjacent markets, leveraging your insights from this first group of customers. Second, if your product is best-in-class, you might be able to actually grow the “small” market and be the only player.
4. Look at Your Results
It’s really as simple as looking at your customer base and finding out how many customers and leads are coming in. If you have made your niche too narrow, this number will be very low. If that’s the case, you will know that your niche is just too small, and you will need to figure out how to appeal to a larger audience with your product or service.
5. Test Using Adwords
Once you’ve mapped out the customer sales cycle and have a strong idea of all your potential clients at all stages of the buying funnel, translate that knowledge into keywords that you can run in an Adwords campaign. Using AdWords, you can see impression share. If you are bidding high and have maxed your impression share, but ROI is just not there, the niche is too small.
6. Analyze Search Traffic and Global Reach
Analyzing search traffic is a great way to prepare for niche marketing and audience targeting. Google Keyword Planner allows you to find relevant search phrases, their traffic volume, and other long tail keywords that are even more specific to your audience’s need. After this is done, you should also look into global search trends to see how far you can scale your reach outside of the U.S.
7. Focus on the Total Addressable Market
The real question is the size of the real total addressable market (which you want to be as large as possible). If a customer niche is a true stepping stone to serving the TAM, then you’re in good shape regardless of size.
8. Look at Your Data
It is tricky to work out whether the niche is too small, or if your products or site simply don’t appeal to that niche. Conversion rates are a useful metric here. If your site gets a small number of visitors and high conversion rates, you may have a niche size problem. If you’re seeing many visitors with a low conversion rate, think about the sales process, site design and value proposition.
9. Know What You Want the Business to Be When It Grows Up
Market size matters to the extent that the business can sell “enough” units to turn a profit. There are lots of businesses that cater to niche markets, and while they generate a great living, the business will never grow large enough to attract significant capital. That’s okay if it matches your business goals. If not, ask how you can expand your offering to a larger market.
10. Research Your Market First
Many companies make the mistake of implementing sales and advertising initiatives without researching the market first. You need to determine the number of prospects in your population and what percent would be interested in purchasing your product. Other questions to ask include how easily would it be to reach your target and how many of your competitors are marketing to your audience.
11. Try a Four-to-Eight Hour Market-Sizing Exercise
Use a service such as Zoominfo to pull sample lists based on certain criteria. This will help you gauge how many companies there are in X industry of a certain size. Then you can assume a max penetration percentage and multiply it by your average sales price by customer type to get a basic understanding of the maximum amount of dollars you could generate from that market. It’s rough, but not a bad proxy.