Companies are trying to create upscale niches

Symptom: Competitors, trying to differentiate themselves, seek more profitable market niches as margins in the heart of the market fall. Some move upscale, while others modify their product to appeal to a unique customer segment.

Implications for the market:

• Companies moving into niches can follow one of two basic approaches:

  • One approach is product based. A company can develop products for every price point. This is often the approach taken during hostility by larger competitors, and the process is accelerated if the niche segments are significantly more profitable to serve than the heart of the market or if growth of the main market slows.

  • Another approach is based on customer selection. A company can offer standard products at or above standard prices to a set of customers chosen because they have special service needs. With this strategy, it is important that prices remain sufficiently high so that larger companies will not feel threatened and retaliate with low prices and superior economies of scale. It is also crucial that service levels be unquestionably superior to those of the mainline players.

• Either strategy can be very profitable, even though it may not contribute very large volumes. Since niches are rarely more than a quarter of the size of the heart of the market, they usually offer only a modest addition in market share for the mainline player.