Niche Strategy!
Niche down to scale up as the first law of business!
Tesla was not the first to try to build a successful EV vehicle.
How did it scale up to become the largest EV manufacturer in the world?
Let me tell you the whole story through the framework below!
In the mid-late 1990s, General Motors built a car called EV1.
Source: RightBrainPhotography (Rick Rowen) derivative work
The car was supposed to target a more significant segment of the car market.
This made sense for General Motors because, as an established automaker, it made sense to investigate the development of an electric vehicle only if this would target a large market.
Yet, this turned out to be a complete failure.
That's the core difference between a startup and an incumbent.
When launching new products, an incumbent like General Motors tries to go after large market segments right on (targeting the late majority).
A startup with constrained resources must do the opposite.
A company like Tesla, with limited funding, had to figure out how to niche down the market as much as possible to showcase the technology without going bankrupt.
To Tesla in the early days, it didn't matter how small it was the niche it was going to tackle.
What mattered was the ability to showcase the technology at first.
This is a core difference, as whereas new entrants develop markets by starting from tiny niches, incumbents try to launch markets by starting from the masses!
The former approach creates options to scale, where failure is cheap and bearable.
That’s the essence of market expansion theory, which is critical to developing any tech business model.
The latter creates a scenario where failure gets so expensive that if the product doesn't reach the masses, it will be withdrawn, and progress will be stopped for years!
Therefore, Tesla used the Roadster as a gateway to the car industry, targeting a tiny market segment of innovators who supported Tesla's mission.
Over time, Tesla produced other EVs in parallel to address increasingly large market segments.
It took Tesla fifteen years to start working toward mass-producing the Model 3, and this strategy is still ongoing.
While the process above seems linear, Tesla's history is anything but linear.
Thus, this below is just the tip of the iceberg! And Tesla is as popular as ever!
The essence of scale is to - initially - scale down!
Thus, here are a few key lessons worth remembering here:
Smaller Market Size
Whereas incumbents try to tackle mass markets right off the bat.
New entrants, with limited funding and constrained resources, niche down to the point of tackling, what seems, an uninteresting microniche.
Over time, that microniche can turn into a giant industry!
Cost of failing
The incumbent comes up with a strategy where failure gets extremely expensive, and a failed launch turns into an unsuccessful product for years.
A new entrant instead niches down as much as possible to make failing fast and cheap.
In the case of General Motors, the failure of the EV1 was such that still, in the 2020s, the company had to recover and compete in full in the EV industry.
Options to scale
A key thing to understand is that you don't need to go after an extensive market when launching new products.
Tackling a large market requires economies of scale.
And achieving economies of scale requires a foundational product that has been iterated many times over at various scales of production.
This process takes years to build up.
Thus, it would be best to look for small opportunities that create options when launching a whole new product to scale.
This means you can always decide - once the product works on a small scale - to try to make it work on a larger scale.
The opposite is not true!
When you try to make a product work on a large scale, failure is almost guaranteed.
There is one exception to the rule, and that is Apple's iPhone. The rest is mainly guaranteed failure.
Strategy vs. product launches
When building a new market, you must shift your mindset from product vs. strategy.
The product launch mindset is that you want to see the product succeed at scale.
Instead, a strategy mindset requires understanding that for a product to be successful at scale, it needs to be rolled out through various stages of iterations, at various scales, for months or years.
In some cases, it might take decades.
This doesn't mean you can't build a viable business right on.
Quite the opposite. By targeting the niche, you create the ability to bootstrap the business as you go after a small - yet profitable - segment right away.
And only later do you look for scale.
Indeed, scaling is extremely expensive, resource-intensive, and might temporarily turn your business from cash making machine to a cash-burning machine...
In other words, today's microniches are tomorrow's mass markets!
Identify your Microniche
Therefore, if you're starting a business today, you need to be as specific as possible when identifying a potential target.
Indeed, generally, micro niches represent a small part of potential customers within a broader niche.
While niches have advantages, micro niches present even more opportunities in the short run. Some of them are:
A less crowded space.
With potentially high conversion.
An extremely engagement community.
Very high margins.
A strong demand.
A potentially strong brand recognition.
Thus a lasting competitive advantage.
How do you pick a microniche?
Let's start with a simple example. Let's say you're opening up a bookstore and looking for opportunities to kick off the store.
Where do you start?
The platform with the most data regarding books is definitely Amazon. You start from the Amazon's broadest categories to start looking for opportunities:
There was a time when it was possible to stop there as the web was not such a crowded space for you to start a business. However, nowadays, you need to look at your microniche at a lower level.
Thus, saying something like "I'll start from literature or historical fiction" isn't enough. Those are too broad. So, where do you start?
Go a level down:
Within Amazon's literature and historical fiction, we can identify a further category for us to start with. For this example, I took something like "historical fiction" and went a level down:
I selected, for instance, "Reinassance" as the key area within the micro-target I'm picking to kick off my business distribution strategy.
Thus, the process looks something like this:
Within that microniche you can see how the bestseller has quite some substantial reach:
The interesting thing is that what might actually seem like a very small audience turns out to be a decent audience for a business that is starting out.
Indeed, by crossing the data from Amazon to the keyword volume for the book's author "Johanna Lindsey," you can see how she is a micro-celebrity:
Example of how a microniche analysis uncovers the audience around a micro-celebrity and opens up opportunities to kick off your business distribution (data: SEMRush)
It is interesting to notice how we uncovered a potential audience of over four thousand people each month by doing simple research on Amazon and crossing that with keyword volume.
Thus, if you were to start a bookstore in that category, you might want to make sure all the books of that author are available and create a content strategy around them.
For instance, invite the author for an offline session with her fans.
Then, transmit that live online so that you can reach a wider audience and create the first set of loyal customers for your bookstore!
To succeed, you want to limit your options today to create options to scale tomorrow!
Recap: In This Issue!
Tesla was not the first to attempt to build a successful electric vehicle. General Motors created the EV1 in the mid-late 1990s to target a larger segment of the car market.
General Motors' approach with the EV1 turned out to be a failure, highlighting the difference between incumbents and startups in market entry strategies.
Startups like Tesla, with limited funding and resources, focus on niching down the market to showcase their technology without going bankrupt.
Tesla used the Roadster as a gateway to the car industry, targeting a small market segment of innovators who supported their mission.
Over time, Tesla expanded its offerings to produce EVs for larger market segments, with the aim of eventually mass-manufacturing the Model 3.
Scaling down initially is essential for new entrants, as it allows for cheaper and faster iterations and failure, creating options for future scaling.
Incumbents often face higher costs of failure and struggle to recover from unsuccessful product launches.
Launching new products doesn't require targeting a massive market from the start. Small opportunities can be pursued initially, with the potential to scale later.
A strategy mindset is needed when building a new market, understanding that successful scaling takes time and multiple iterations.
Micro niches, even within broader niches, offer advantages such as a less crowded space, high conversion rates, engaged communities, high margins, strong demand, and potential brand recognition (thus differentiation).
When selecting a micro niche, it is important to be specific and conduct research to identify opportunities within broader categories.
By focusing on a microniche, businesses can uncover potential audiences and create targeted strategies to kick off their distribution and gain loyal customers.
Real World Case Studies
Amazon Web Services (AWS)
Microniche Strategy: AWS started by offering cloud computing services to developers and startups, targeting a niche market in need of scalable and cost-effective infrastructure.
Scale Unlocked: As AWS gained trust and adoption in the developer community, it expanded its services to cater to larger enterprises, unlocking massive growth in the cloud computing market.
Experimental Framework: AWS encouraged experimentation by allowing developers to easily test and launch new services, fostering innovation within the platform.
Netflix
Microniche Strategy: Netflix began as a DVD rental-by-mail service, targeting movie enthusiasts who preferred the convenience of home delivery.
Scale Unlocked: After establishing itself in the DVD rental market, Netflix transitioned into a streaming service, reaching a broader audience and revolutionizing the way people consume content.
Experimental Framework: Netflix invested heavily in data analytics to personalize content recommendations and continuously tested pricing models and original content to optimize user engagement.
Shopify
Microniche Strategy: Shopify initially focused on providing e-commerce solutions for small and niche businesses looking to establish an online presence.
Scale Unlocked: As e-commerce grew, Shopify expanded its services to accommodate larger enterprises, powering online stores of all sizes.
Experimental Framework: Shopify offered a platform for developers to create apps and themes, allowing merchants to customize their stores and experiment with different features.
Slack
Microniche Strategy: Slack started as an internal communication tool for a gaming company, targeting a niche market of gamers and tech startups.
Scale Unlocked: Recognizing broader applications, Slack expanded to serve teams and organizations in various industries, becoming a popular team collaboration platform.
Experimental Framework: Slack encouraged third-party developers to build integrations and bots, fostering an ecosystem of productivity-enhancing tools.
Tesla
Microniche Strategy: Tesla began with the Roadster, targeting a small market segment of electric vehicle enthusiasts and early adopters.
Scale Unlocked: Tesla expanded its lineup to include more affordable electric vehicles, gradually scaling up its production and market reach.
Experimental Framework: Tesla continuously improved its battery technology, autonomous driving features, and charging infrastructure, pushing the boundaries of electric vehicle innovation.
Airbnb
Microniche Strategy: Airbnb started by offering air mattresses in their own apartment, targeting travelers looking for affordable lodging.
Scale Unlocked: Airbnb expanded its platform to include various types of accommodations, attracting a global user base of hosts and travelers.
Experimental Framework: Airbnb introduced features like instant booking, reviews, and host guarantees to build trust and reliability within its community.
Dropbox
Microniche Strategy: Dropbox initially targeted individuals and small teams with a simple file-sharing solution.
Scale Unlocked: Dropbox expanded its services to include business plans, attracting larger enterprises and organizations.
Experimental Framework: Dropbox continuously improved its file synchronization technology and added collaboration features, such as Dropbox Paper, to enhance its platform.
Uber
Microniche Strategy: Uber launched as a premium black car service, targeting urban professionals seeking a more convenient alternative to taxis.
Scale Unlocked: Uber expanded its service offerings to include various ride options, catering to a broader demographic and global market.
Experimental Framework: Uber experimented with ride-sharing, food delivery (UberEATS), and autonomous vehicles to diversify its business and stay at the forefront of transportation innovation.
Microniche Strategy: Pinterest started as a visual bookmarking platform for hobbyists and DIY enthusiasts.
Scale Unlocked: Pinterest expanded its user base by attracting a broader audience interested in discovering and organizing ideas across various categories.
Experimental Framework: Pinterest introduced features like guided search, shopping pins, and promoted pins to enhance user engagement and monetization opportunities.
Microniche Strategy: Instagram initially focused on mobile photography enthusiasts, offering a simple platform for sharing photos.
Scale Unlocked: Instagram expanded its user base by incorporating features like Stories, video sharing, and e-commerce tools, making it a widely used social media platform.
Experimental Framework: Instagram regularly introduced new creative tools, filters, and advertising options to keep users engaged and attract advertisers.
Ciao!
With ♥️ Gennaro, FourWeekMBA
