Why a Niche Targeting Strategy Works Best for Tech Startups

This article is an excerpt from the Shortform book guide to "The Cold Start Problem" by Andrew Chen. Shortform has the world's best summaries and analyses of books you should be reading.

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What is a niche targeting strategy? Why does this strategy work best for business growth, especially for tech startups?

According to Andrew Chen, if there’s a secret to success in the tech industry, it’s a thorough understanding of the network effect. He claims that using the network effect together with a niche targeting strategy is one of the best ways to make your startup profitable.

Read on to learn why a niche targeting strategy helps tech startups grow, according to Chen.

Attracting New Users: The Niche Targeting Strategy

According to Andrew Chen’s book The Cold Start Problem, the more users you gain, the more valuable your product becomes and the easier it is to profit and grow. But if bigger equals better, is it even possible for a company starting from scratch to compete with established tech giants? Chen argues that the first step of creating a business capable of competing with tech giants is to create a single network that’s as small as possible and still functional, then get a group of users to join that subnetwork all at once to achieve network stability quickly. Otherwise, that subnetwork is doomed to fizzle out and fail. The minimum number of users you need to have a functional subnetwork differs depending on your product. Chen refers to this minimum number of users as your subnetwork’s “Tipping Point.” In this article, we’ll explain how to establish this subnetwork based on Chen’s niche targeting strategy.

(Shortform note: Chen uses the phrase “Tipping Point” to describe two similar, yet distinct ideas. The first is the point at which a subnetwork has enough users to function well. The second is the point at which you have enough subnetworks accelerating the growth of your whole network to dominate the market.)

Once you hit subnetwork stability, users will regularly use your product and may share it with others, giving you a stable or growing user base. However, Chen warns that if at any point a subnetwork doesn’t have enough users to achieve stability, the few users it does have will flee the dysfunctional product and the subnetwork will collapse. For example, if enough people from a friend group leave a social network, there will no longer be enough content from friends for the app to be enjoyable, and the rest of the friend group will all delete it.

(Shortform note: Arguably, the number of people in a given subnetwork isn’t the only factor that determines whether it will survive. Certain kinds of people can have a remarkable influence on whether a subnetwork becomes stable or collapses. In The Tipping Point, Malcolm Gladwell argues that even one special person can have an outsized influence on the behavior of groups—in this case, whether people start and keep using your product, allowing the subnetwork to succeed. For example, if you’re a “Connector,” you’re gifted at making friends from many different communities, so you’re likely to know more people who’d like to join the subnetwork. Thus, a smaller subnetwork that includes many Connectors may survive, while a bigger subnetwork with none may collapse.)

Why Target a Niche Group (at First)?

As we’ve established, to reach subnetwork stability, an entire group of interacting users must join at the same time. Chen argues that the best way to accomplish this is to use a niche targeting strategy, which involves designing your product for an extremely specific group of users—this could be an internet community of users who share a niche hobby, a single team within a company, or even the attendees of a single event.

By using Chen’s niche targeting strategy, you can ensure that 1) your product fits their needs, and 2) the users in your subnetwork will have several other people in the subnetwork they want to interact with. With these conditions met, Chen asserts that your users will form a stable subnetwork, making it far easier for you to expand your network in the future.

Your product doesn’t have to serve a niche audience forever: Eventually, once you’ve attracted enough subnetworks of niche users, greater network effects will take effect, and your network as a whole will be valuable enough to attract a broader audience (as we’ll see later).

Aim for Niches Big Enough to Be Profitable

In Crossing the Chasm, Geoffrey Moore agrees with Chen that the best way to build a successful startup is to begin with a niche audience and later expand to a broader mainstream market. However, Moore disagrees with Chen on a key point: In Chen’s eyes, no network is too small as long as it’s stable, since you can scale up stable networks and convert those huge networks into massive profits later. In contrast, Moore advises exclusively aiming for niches that are profitable enough to power your expansion.

Unlike Chen’s niche targeting strategy, the main reason why Moore suggests designing your product for a niche is that it’s far easier to dominate a niche market and start making money than it is to try and scrape together profit in a mainstream market. This is because markets are largely winner-take-all, with outsized profits for the market leader, and it’s easier to become the leader in a niche market.

One big reason why it’s easier to become a niche market leader is that users in niche markets communicate much more closely with each other than the members of mainstream markets. Thus, if your product is good, word will spread, and it’ll quickly be adopted by a far bigger group than if you targeted more generic users.

Targeting a Niche Group Helps You Challenge Market Leaders

In explaining his niche targeting strategy, Chen notes that in particular, aiming for a niche user base is the primary way startups can overturn large, established networks, which serve a more general audience. Networks that try to include everyone can’t cater specifically to every group that uses their product. By stepping in to create the ideal product for an underserved niche, you can attract full subnetworks away from your competitor.

For example, if you want to compete with Kickstarter, you could start by catering your crowdfunding app to filmmakers specifically. If you can give moviemakers a fundraising experience that’s significantly better than Kickstarter, that whole community will switch. Perhaps you can include a more specialized discovery system that helps passionate movie fans more easily find and fund projects they’re interested in.

(Shortform note: In The Innovator’s Dilemma, Clayton Christensen further details why it’s possible to steal niches from larger competitors: Corporations choose not to compete over niche markets. Larger businesses have far greater overhead costs than startups do, and they must earn much higher profits than startups to maintain their ambitious growth targets. For these reasons, small niche markets aren’t profitable enough for large companies to justify spending time and money addressing their unique needs—these companies have to focus on more profitable mainstream markets. Thus, they intentionally underserve niche markets, which new startups can use to their advantage.)

Why a Niche Targeting Strategy Works Best for Tech Startups