What is a market niche?

Market niche (definition)

A niche is a distinct market segment of specific customers, products or services within a larger market.

A market niche is not necessarily small – just focused on a certain audience or need. For example, the LGBTQI+ community is a very large market niche.

Types and examples of niche markets

Niche markets are often defined by:

  • demographics: the target customer’s age, gender, income, location, culture and other socio-economic factors
  • psychographics: such as the target customer’s attitudes, behaviours, aspirations, activities and spending habits
  • firmographics (for a business market): such as the target business’s industry, scale, location or legal structure

Niche markets come in all shapes and sizes. For example:

  • manufacturing of the individual components of fences, such as stays and brackets
  • grooming services for large, difficult (and possibly scary) dogs
  • accountancy services for actors, writers and others in the creative arts
  • imported speciality foods for homesick immigrants
  • chauffeured wine tours around local vineyards (“you drink, we drive!”)

Advantages and disadvantages of a market niche

Focusing on a niche can be a good way to start a business. The startup can initially focus on its research, development, and marketing, and wait for an opportunity to expand to more market segments later.

Also:

  • it’s easier to get noticed when targeting a narrower group
  • focusing on fewer tasks or products is often really efficient
  • marketing can be highly targeted
  • the business value proposition is clear for customers, partners and investors
  • it’s simpler to build loyalty with a well-defined customer group and word-of-mouth marketing often works well in niche settings
  • it’s also easier to invite feedback and improve products or services

But niche markets are typically smaller than mass markets, meaning that businesses selling to a niche face particular challenges, such as higher costs – for example, niche businesses may miss out on economies of scale, and specialized knowledge and training may be expensive.

  • Niche businesses will also need to precisely target their marketing to deliver returns, and it can be difficult to stick to niche product or service specifications
  • Smaller markets are more vulnerable to disruption – bad reviews are more damaging to niche businesses, and small niches are more susceptible to changing tastes, trends and market downturns

Creating or building a market niche

A new business might launch specifically to serve a niche market, or an existing business may change focus towards a niche.

New niche businesses will typically identify a market need, then conduct market research to confirm the hunch and estimate the size of the market. They then test their idea with the target market, and trial it (such as with prototypes).

Established businesses can refocus towards a niche if they notice:

  • a specialized requirement forming among their existing customers
  • a fit between their product or service and specific external customer groups
  • a new niche emerging in response to social, technological or economic changes

See related terms

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Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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