30/05/2019 – Special Report / Business Strategy / Specialisation / Niche Markets
Know your niche
Strategy consultant Dr Paul Raspin outlines how to ‘own’ a segment through targeting and specialisation.
There are two ways to ‘own’ a niche market. Firstly, by focusing on a specific segment of demand through targeting and delivering more customer-perceived value than less focused rivals; secondly, through product specialisation where you focus on a limited range of products and sell them as widely as possible.
Targeting is dependent on there being different types of customers with different needs. The firm needs to be keenly aware of the requirements of the segment that it serves and sensitive to often-subtle changes in those requirements. This is important to manage down the risk associated with serving a narrow slice of the market.
De-risking the pursuit of targeting and specialisation is brought about through securing the ‘number one’ position as favoured supplier, and continuing to protect and defend that position.
Let’s first consider targeting. Where a market subdivides into segments of demand, each segment having different needs and preferences, there is an opportunity to pursue a targeting strategy. Customers could have the same needs, but they might weight these needs differently, thus creating distinct segments of demand.
These differences are sources of opportunity for a firm pursuing a targeting strategy. Choosing the targeting strategy could require a substantial degree of change to the firm as both the customers served and the products supplied to meet their particular needs may be different to the status quo.
If we get the targeting strategy right, we will be offering more perceived value to these targeted customers. We can reap the rewards of providing superior perceived value in two ways: if we keep prices the same, our market share will grow; or we could raise prices and thereby increase margins.
We can use the lock and key analogy to characterise the targeting strategy. In pursuing market led segmentation, the role of strategy is to steer the firms to more closely fit the specific needs of the customer segment: to cut the key that ‘fits’ the customer lock, and thus unlock the potential value that is as yet unrealised. By more accurately meeting the segment’s specific needs, there should be opportunities to premium the price – and if there are similar segments in other geographic markets, there should be opportunities for growth.
An excellent example of targeting strategy is Long Tall Sally, a retailer of clothing and shoes for women 5’8’’ and over. It was established by Judy Rich – a UK domiciled American. At 5’11’’ Judy struggled to find clothes that fitted her well. Her experience was that clothes for taller women were simply made longer as opposed to being tailored for tall women. Like other firms that adopt a targeting strategy, Long Tall Sally is very clear and focused on one particular segment of consumers. This focus is reflected in its strapline – ‘Global destination for tall fashion and footwear’.
The challenge in executing the targeting strategy is two-fold: firstly, the firm needs to figure out and specify the exact target customer segment; and secondly, the firm needs to work out how to market to them in just the right way. This is especially important in the B2B space.
When a target customer is exposed to a firm’s marketing campaign, it should stop them in their tracks. They should be “wowed” with a sense that the firm ‘gets their audience’. This is by no means easy to achieve – however, the rewards for matching target segments with on-point, compelling market messages can be substantial.
The core to Long Tall Sally’s success is staying focused on its very specific segment of tall women. This means investing in understanding what it means to be a tall woman and using that insight to be the first choice of fashion for tall women. In this context, the targeting strategy means keeping in tune with changing tastes across the world.
With product specialisation, the aim of the strategy is to seek out those segments of demand that value the specific and often unique qualities of the product or service. Specialisation involves incremental product improvements with the relentless search for new customers. WD40 is a standout product that is now reportedly in four out of every five American households. Its origins go back to 1953 when a small business, Rocket Chemical Company, and its staff of three aimed to develop a rust-prevention solvent and degreaser for the aerospace industry. After 40 attempts to get the water displacing formula worked out, they settled on Water Displacement 40 formula, now known as WD40.
The founder of the Rocket Chemical Company, Norm Larsen, reasoned that consumers might find a use for WD40 at home, leading them to offer WD40 for sale to the home market in San Diego in 1958. Interestingly, to avoid disclosing its composition the product was not patented but instead remains a trade secret.
Such was the success of this product that the company was renamed after its single product in 1969 to become the WD40 Company Inc. Following its successful listing on NASDAQ in 1973, WD40 has grown by leaps and bounds and has applications in numerous markets including automotive, manufacturing, aviation, construction and home improvement.
Today WD40 is a global single-product success story, selling in more than 160 countries, with a recent market capitalisation of US$2.48 billion. It is an outstanding example of specialisation and market dominance built around a niche product.
The aim of the product specialisation strategy is to establish your products in the marketplace so well that it isn’t worth another firm attempting to enter that sector. In this sense, the successful specialisation strategy builds entry barriers that deter other firms from competing in the market. To return to our lock and key analogy, specialisation is finding the locks that fit the unique product ‘key’.
About the Authors
Dr Paul Raspin is the founder and Managing Director of Stratevolve, a strategy consultancy that works exclusively with senior executives and management teams to identify how to gain competitive advantage and create and capture signiﬁcant value. He is a senior visiting fellow at Cass Business School where he teaches strategy and ﬁnance to senior executives on the Executive MBA course.
Paul Raspin and Cliff Bowman are co-authors of ‘What's Your Competitive Advantage?: 7 strategies for running a more profitable business’ – out now, published by FT Publishing, priced £19.98