The Ecommerce Revolution: the Emergence of Profitable Niche Markets Online and Cheap Prices on Mainstream Items

Posted on August 29, 2009. Filed under: Amazon, eBay, Other | Tags: , , , , , , , , , , , |

There is a mainstream market for goods and services and there are niche markets for goods and services.  The competitors in the mainstream market are usually large coporations who often battle their competition by using a lower price as an inducement to consumers.  If the differences in Widget A1 and Widget A2 and Widget A3 are very minor, then these mainstream sellers don’t have many things they can use to differentiate themselves other than price.  Razor thin margins might be okay for a company’s survival if the company sells in huge volumes.

Niche markets have a much smaller group of potential customers and, because of the smaller consumer purchasing power, these niche markets are often overlooked by the large corporations.  And that is where the small and medium sized ecommerce seller can effectively compete.  Instead of slugging it out with the larger companies, who most likely can source the product at a cheaper price and get discounts on shipping costs, successful ecommerce sellers know that the best opportunities await them in the niche markets.     

Over time, we have discovered that there are really two different strategic approaches a company can take if they want to sell in niche markets.

Strategy #1: Niche products

Having a “different” product, one that can easily be differentiated from the mainstream seller’s product, is one way for a company to establish dominance in a niche market.  For example, I wrote a recent blog post about my trip to the Dublin Dr Pepper bottling plant (click HERE to read that blog post) where I was able to purchase Dr Pepper made with real Imperial sugar rather than with corn syrup.  The Dr Pepper sold in Dublin, Texas is “different” from all other Dr Pepper sold throughout the world.  And that difference is so important to some people, like me, that consumers are willing to drive a distance to obtain the items and/or pay more money for the niche product. 

 Strategy #2: Niche marketing

Sometimes, sellers can “differentiate” their mainstream product by marketing their product specifically to a segment of the market that is small.  The product itself is not different but rather the message about the product is what is different.

The perfect example of niche marketing is the new marketing campaign from Toys R Us:

The 2009 Toys R Us Toy Guide for Differently-Abled Kids

 

TRU.

 

The toys featured in the TRU catalog are not niche products.  The toys are mainstream toys, made for the mainstream public.  However, the TRU guide includes a message about differently-abled kids and there are special sections in the guide where TRU has aggregated together various toys that would be helpful for a kid’s development in a certain area.  For example, click on “Social Skills” in the guide, and you’ll see a list of toys that would help a differently-abled kid to develop better social skills.  But the toys in the guide, such as the Fisher Price tea set, are not made unique for differently-abled children.

 

TRUguide

 

Selling in a niche market usually results in greater profit margins for the seller.  It’s true that you sell fewer items but you make more profit per item.  And you generally have less competition since the segment of the market is smaller. 

As a parent of a left-handed child, I am always prepared to pay more because my child is part of a niche market.  Since only 10-12% of the population is left-handed, the cost to produce fewer left-handed gloves or fewer left-handed guitars is often times higher than the average cost to produce the equivalent right-handed item.  And even if and when it is no more costly to produce a left-handed item, the manufacturer still charges more to the parent of a Southpaw.  Why?  Because they can.  A glove for a left-handed first baseman is so different from the glove for a right-handed first baseman that parents are willing to pay extra for that differentiation.

When a consumer perceives little or no difference between products (or the sellers of those products) then the purchasing decision is weighted more heavily toward price differentiation.  So, the real key for small and medium size ecommerce sellers who want to effectively compete in the marketplace is to be different.  Sell a product that is different (niche product) or send a different message about the mainstream product or about your company who sells that product (niche marketing). 

Recently I was asked if I thought there were still opportunities for small companies to get into the ecommerce business.  In my opinion, this is a great time for small to medium size companies to expand or start an online business but I think the opportunities are mostly in niche markets.  I don’t think small online businesses should attempt to compete directly with the large companies who have already established themselves online by trying to emulate those big business’ success.  Instead, small companies can carve out a small piece of the market where they don’t have to compete with the big corporations.

Take, for example, the trend of retail stores cutting back on the number of skus they offer (see article titled Can’t find your favorite toothpaste? Retailers are choosing for you).  Retail stores have to sell individual products that appeal to the most people in that local area.  But for certain products that a consumer really wants but which is not available in their local area, some shoppers are willing to go online and order the product and wait for it to arrive.  And if you are the ecommerce merchant offering that niche product that perhaps is only desired by a few dozen people in every city in the world, your competition is not the large retail chain store who carries only the mainstream products.

A typical online shopper (like me) purchases on the Internet: 

(1) when they can get a better price on the same product offered in their local area,

(2) for convenience [ex: I order from The Gap online so I don’t have to drive to the local Gap and hope they have my size in stock] and I get free shipping so the price I pay for the items are exactly the same or

(3) because the item is not sold in my local area.

In my case, I generally order from a large companies’ own website, or from “large platforms” like Amazon, when I am ordering online to save money.  And I’m sure that is because those larger companies have a competitive advantage when it comes to pricing.  But when I am searching out unique items, those products not sold in my local area, I almost always end up locating those items from smaller-sized ecommerce sellers.  And I find the smaller ecommerce sellers, with their unique items, on platforms of varying sizes.

So, why did this shift which made it profitable to sell to niche markets occur?  The answer is partially found in looking at the past.  The Industrial Revolution actually changed society because mass-produced manufactured items were cheaper and mass produced items became more standardized and uniform in quality.  And, as a result, the common person could afford to buy things, lots of things.  But today, we are in the midst of an Ecommerce Revolution which is changing the way in which consumers shop as well as the items consumers want to buy.  Most people in countries where consumption is the greatest have access to the internet.  And, as a result, these consumers have the ability to seek out the best prices for mainstream items and also have access to purchase unique items for which they are willing to pay a higher price.

The very nature of the relationship between businesses and consumers are changing once again.  Before mass produced items, a consumer purchased a uniquely made item or they made the item themselves at home.  In the Industrial Revolution, change in the manufacturer-consumer relationship occurred as a result of things that the manufacturers did to produce cheaper items but cheaper items could only be made if they were more “standardized”.   

As a result of the affects of the Ecommerce Revolution, buyers can now use the internet to locate a cheap price for mainstream items.  And, with few exceptions, online buyers don’t really care whether they buy on eBay or Amazon or a company’s own website if the price is the best.  It really isn’t that difficult for a consumer to find the best price online fairly quickly.  Searching for a good deal online isn’t much different from searching for a good price in the local area.  The tools are just different — the computer to search the internet versus the telephone to call or the car to travel to the local store. 

But it is the niche markets that have experienced the most radical change due to the Ecommerce Revolution, in my opinion.  In order to sell to potential customers in niche markets, you have to be able to let them know you exist.  And the internet allows sellers to offer their wares online and take orders from all over the world.  Local niche markets were often times not nearly big enough but the size of a worldwide niche market might easily support a small to medium size company’s sales and profitability efforts.

Small to medium size sellers who sold mainstream items online in the late 1990’s probably did very well at that time since there was little competition on the internet then.  But today, small to medium size sellers who offer their items to niche markets have the best opportunities to survive the Ecommerce Revolution and to succeed. 

And I’ll take my statements a step further by saying that the platforms that differentiate themselves on some aspect of the online purchase experience, other than price, will also be winners in the Ecommerce Revolution.  Etsy is “the” place for handmade items.  Amazon is “the” place where a consumer can get the best customer service. 

In the past, eBay was “the” place to find anything and everything.  eBay was unique.  But now eBay is trying to market their platform as being “the” place to find the best price.  But small sellers cannot offer low prices long-term because they don’t get the price breaks that a large company does and they are burdened with very high selling fees and they are subsidizing the larger Diamond sellers who get price breaks.  But even the large sellers, who are charged lower selling fees by eBay, cannot offer their items consistently cheaper.  Take, for example, Ina Steiner’s article on Auctionbytes titled “GM Cars on eBay Priced 2% Higher Than Market Average” (click  HERE to read that article).  I don’t think eBay sellers can consistently offer the best price and, even if they could, I think it is the wrong marketing strategy for the eBay platform. 

And while eBay is trying to reinvent itself as the “cheapest place on the net”, the eBay platform is losing sellers.  At the same time, I see Amazon’s variety of skus increasing at a rapid pace and the number of sellers seems to be growing at a good pace too.  I have only been selling on Amazon 18 months and already lots of  competitors in my hobby niche have jumped ship from eBay and are now selling on Amazon.  They bring with them all the variety to Amazon just as we have done.

Just as the Industrial Revolution put some companies, and even complete industries, out of business … so will the Ecommerce Revolution have a similiar affect.  And while some companies and some third party platforms are claiming that the weak economy is the main problem, I would argue that there is a bigger shift occurring that will have a much longer term impact than the weak economy.

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2 Responses to “The Ecommerce Revolution: the Emergence of Profitable Niche Markets Online and Cheap Prices on Mainstream Items”

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I’ve found your analysis right on. In my own business, the niche items are doing very well and the ones with competitors aren’t faring as well.

Further, eBay itself used to be a place for a vast number of niches – and now it’s mostly mainstream. This trend is one reason why their platform is dying

Any seller who sells any ordinary products with a barcode (UPC/SKU/Product details) on ebay (or Amazon)-that is still in-print and available from wholesalers is doomed….2004 was perhaps the last time a seller in a catagory like say, media, could make a decent profit.

In 2009, it’s down to those left who are just suriving on cashflow (no exaggeration)… or the very few mega sellers (like Jack Scheng) who obtained the economies of scale (on the ebay of yore), to be able to co-exist with the diamond sellers of 2010…

Good essay, Brews! Stay with your niche!

Dan


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