One rule of thumb that you should adhere to when searching for a business idea is to select an idea that you can sell into a niche market.

A niche market is a place within a larger market segment that represents a narrow group of customers with similar interests and needs. For a new business, selling into a niche market is crucial for at least two reasons. First, it allows a firm to establish itself within an industry without competing against major participants head on. Second, a niche strategy allows a firm to focus on serving a specialized market well instead of trying to be everything to everybody in a broad market, which is nearly impossible for a new entrant. An example of a firm that sells into a niche market is Prometheus Laboratories, a company that sells diagnostic services to the 15,000 doctors in the United States who specialize in gastroenterology and rheumatology. Explaining his firm’s strategy of developing world-class expertise in specialized areas, then CEO Michael Walsh said, “We want to be an inch wide and a mile deep.”^[1]

Another way of thinking about this topic is to distinguish between vertical and horizontal markets. A vertical market, which is analogous to a niche market, focuses on similar consumers or businesses that have specific needs. For instance, a start-up business might focus on providing accounting software designed specifically for specialty eateries, like small coffee and smoothie restaurants. A horizontal market meets the needs of a broad swath of consumers or businesses, rather than a specific one. A start-up that tries to sell an accounting software product to all small businesses would be selling into a horizontal market. It’s easy to imagine how much more difficult it would be for a new business to take on industry leaders and try to sell to a broad market rather than limiting itself to a smaller niche. Once a business gains momentum, it can expand into related areas and broaden the scope of its market.

A niche market is a place within a larger market segment that represents a narrow group of customers with similar interests and needs.

Some new businesses, as a result of the nature of their industry, do compete head-to-head against larger rivals for some of their products but can still benefit by identifying niche markets to specialize in. An example is a new nursery that sells plants and lawn and garden supplies. A portion of what the nursery sells, like its generic plants and its name-brand lawn and garden fertilizer, may complete against larger stores, like Home Depot and Lowe’s, which often have garden centers. If this is the case, it’s important that the nursery seek out niche markets, within the lawn and garden industry, which will set it apart from its larger rivals. For example, it might specialize in providing hedges, shrubbery, and sod for new construction and develop relationships with local builders and contractors. It might also become the “place to go” to purchase outdoor and indoor fountains. Specializing in these areas allows the new nursery to establish a unique identity and offsets, at least in part, the disadvantage of competing head-to-head against larger rivals on some of its products.

Once a business gains momentum, it can expand into related areas and broaden the scope of its market.