Some business owners worry that a niche will limit their opportunities and they’ll miss sales. But a niche can often be the key to growth. What’s more, it can increase your overall business value.
Niches are attractive because it’s much easier to be #1 or #2 in a smaller, niche market. Being number one has lots of advantages, as you typically have the best margins among your competitors, more brand recognition, first call/last look with customers, and other benefits.
Businesses with higher profit margins are generally more valuable than businesses with lower margins – even if they make the same total profit per year. Higher margins mean better cash flow and cash flow is what a buyer uses to pay debt service and fuel future growth. Low margins, on the other hand, can mean less operational wiggle room and increased risk.
Why niches add value:
Stand out: Having a niche makes it easier for your business to stand out in a large, crowded marketplace. Your marketing messages can be more targeted, and that makes them clearer, more personalized, and more memorable.
Specialist position: As a niche business, customers will see you as an expert. That expertise lends credibility to your work and helps make the decision to do business with you easier for your customers.
Shrink your competition: In a competitive market, carving out an area of niche, specialized expertise can reduce your competitive pressures. By targeting a distinct segment of the market, you help ensure that the segment thinks of you first and continually chooses you, again and again.
Compete in the age of specialization: Remote work is accelerating the call to specialize. In the COVID-19 era, we saw more customers get accustomed to remote service delivery (e.g., remote banking, remote meetings, online exercise classes). Likewise, more businesses innovated and found ways to provide their services remotely.
If customers are no longer constrained by geographic area and travel time, it becomes easier for them to leave their local commodity service provider to seek out niche providers anywhere.
Higher margins: Expertise is highly valued. For certain customers, expertise is more important than size, location, or brand name. When you provide hard-to-find services, you can charge more for them.
When it comes time to sell your business, there can be a lot of value in being a big fish in a small pond. If you own a niche, you have more than a good story to market to customers – you have a way to stand out to buyers and investors, too.
Vice President, M&A
Portage M&A Advisory