Business Basics – Finding Your Niche

This short article considers what is meant by business and provides advice on finding your own niche in the age of the Web.

What is Business?

Survival requires many inputs; food, shelter etc etc. Yet more inputs provide additional comforts of life. Humans developed division of labor as means of increasing efficiency and individual utility. Rather than everyone try to do everything themselves, we specialize in a particular function and do it for others in return for the benefit of their functions; the process is blurred somewhat by money.

Business, essentially, is the process identifying the function/niche(s) that you wish to perform, doing it (them) for other people and receiving payment (and using such payments to buy your own needs/wants).

The world consists of billions of people, all consuming and many producing.

The same people act as both consumers (of many things) and providers (of 1 or a few).

Demand

People have a consumption profile consisting of their basic needs, and a prioritized set of wants. People initially seek to satisfy their basic (survival) needs, followed by their wants in order of priority, according to the person’s buying capacity (money).

People can often choose to satisfy their demands (buy) from competing suppliers. In such cases they will likely choose the cheapest alternative of sufficient quality for its purpose.

How People Decide What to Consume

• How much money do I have (capacity to obtain goods/services)
• Satisfy needs first, then wants in order of priority
• May choose to save some money/capacity for future consumption
• May choose (or have to) borrow money/capacity
• Generally choose cheapest option of sufficient quality
• Cost of option includes product + travel/delivery + time + risk (includes cost of research)
• Reputation - Known sources/brands reduce risk
• Inertia, people tend to resist change – ie: harder for new entrants t enter market, added security for existing players
• New sources/brands may bring added value, but with some risk of unknown
• If geographically significant will choose nearest, eg won’t go to cheaper sandwich shop 100 miles away!
• Sentiment / opinion, eg desire to support particular country or supplier

For people to buy your product it must offer something alternatives don’t.

For a physical business that could just be location, eg people buy newspaper from the nearest shop.

Otherwise could be unique product/feature, eg even slightly cheaper, or better quality, or some particular variation.

In the case of small suppliers, each may only be able to satisfy N buyers, so once ‘best’ is at capacity  further buyers look for next best etc, eg restaurants – if your first choice is full, try your 2nd etc.

Why do people buy A over B? Numerous different people with numerous different criteria result in many different products getting sold, ie the long tail effect, meaning many different people are able to participate economically.

Supply

Many people need to sell their services/goods.

What to Supply

• What can you do (well/best)?
• What can you do that there is (sufficient/unmet) demand for?
• What do you enjoy (or at least don’t mind) doing?
• Of what you can do, what returns greatest reward (money)?
• May need to experiment until hit upon right formula
• How much do you want to supply (how hard do you want to work)? Just enough so you can survive? More, in order to meet wants as well as needs (at cost of supplying, eg time)?More in order to build assets to have more free time later (retire early)?

How to supply

Directly (independence / self-employment)

• many customers
• higher volatility (variability in returns)
• potential for greater rewards (but also less rewards)
• greater control of destiny
• alignment of efforts, rewards and goals - greater satisfaction

Indirectly (employed)

• mediated by employment
• lower volatility - but all eggs in one basket, ie all income stops if only job ends
• lower potential
• large part of life controlled by others
• effort / reward / goals mis-alignment, ie: effort directed to satisfying someone else’s goals; rewards disproportionate to achievement; potentially unsatisfying

Actual amount of transactions determined by where aggregate demand and supply curves meet.

Suppliers try to persuade consumers to consume more. Consumers (should) try to save and be judicious in spending. Mismatch in terms of suppliers having huge marketing machine at their disposal to persuade consumers to part with their money.

Previously local presence meant a lot. People would go to what’s nearest to save time/effort/costs, but the Internet provides a global marketplace. This should be good for small businesses due to the low barriers of entry and long tail (huge diversity of demands that can be matched through Web). But also creates a winner takes all environment in which dominant players (eg Amazon, eBay, Facebook) have come to dominate. Smaller players need to find very specific niche/micro-niche.

Does the Internet mean only a few will succeed big time while most will fail or make peanuts? Do the most have to find their own narrow niche?  Or become slaves to the giants working for crumbs from the table?

Overall efficiency is benefited if everyone’s work is independent, aligned with own interests, either in micro-niches or partnering with, rather than being enslaved by the goliaths, eg as affiliates.

Profitability

Profit depends on:

• How essential is product?
• Demand volume – how many people want product?
• How many competitors are supplying similar products?
• How efficient is supplier – amount earned per unit cost?
• How easy is it for competitors to copy product?
• How much can it be leveraged?

Leverage

Is there a maximum you can earn per unit time? Usually services, eg accountant, dentist etc.

Can you leverage product? Eg e-book; franchise – create once, sell many times for low marginal cost; outsource mechanics of fulfillment.

Business Choice – Finding Your Niche

In choosing function take account of:

• innate aptitude
• knowledge/experience
• market demand
• competition
• ‘passion’ – if you don’t have this, you won’t work hard at building your niche!

Be prepared to test different alternatives until find one that works.

Test with Minimum Viable Product, ie simple product that can go to market to give feedback.

Treat business as a never-ending iterative cycle. Continue the process of innovation – monitoring – reviewing.