Quick Takes:
“Go one inch wide and one mile deep.” - John Lee Dumas, Entrepreneur on Fire
I’ll put it bluntly: we are in the midst of a social and business revolution, and I don’t think I’m being a prisoner of the moment when I say that. With the explosion of the internet and the ability to make money online, the look of traditional companies has changed. In the place of large, lumbering, brick and mortar organizations are fast and agile online entities with minimal employees, low overhead, small risk, and massive profit potential.
Whereas before, when the two largest barriers to starting or operating a business were physical startup costs and consumer discovery, it’s now possible to run a multimillion dollar business as a solo-preneur, straight from your living room. The web has quickly become the ultimate democracy - a flattening of the business hierarchy.
For small business owners running profitable online businesses, success comes by filling niche verticals. Unlike horizontal markets that focus on a broad range of consumers and industries (think of a supplier of general office equipment), vertical markets focus on fulfilling the needs of a specific consumer base within a larger industry (think of a supplier of specialized desks for construction engineers).
Where horizontal markets go one mile wide and one inch deep, niche verticals go one inch wide and one mile deep.
Dan and Ian, the online business gurus from TMBA, show us that for business owners looking to build profitable online businesses, niche verticals allow them to be successful. It’s much easier to become an authority in a highly specialized industry than to become a generalist with surface-level understanding of many markets. But, even though niche verticals are highly specialized, they all have common themes that will either eat into your sales or massively increase your profits, depending on your ability to be proactive over reactive.
Consumers in a niche vertical are characterized by the following, from the bottom up: highly fragmented smaller players, mid-level players who spend averagely and consistently, and one or two major players, dubbed “whales,” or “big hairy gorillas.” These whales are the largest spenders in a niche and have enough buying power to affect the entire vertical, and therefore, your online business.
Whales, with their spending habits, will cause a niche vertical to be naturally cyclical, meaning that market-wide sales will ebb and flow based how they decide to spend. On top of this, niche verticals have natural seasonality, where most consumers, whether they be small, mid-level, or major, will spend their money during a specific time period, usually in Q3 and Q4 of a given year.
This means that sales will be volatile no matter what niche you operate. And to a small business owner or aspiring entrepreneur, volatility can be a death sentence. The key, then, is to maximize your returns while simultaneously minimizing your risk of volatility.
You can do this by employing a “solid base and jagged peak” sales strategy. In any business, niche or otherwise, it’s important to have baseline recurring revenue. In a niche vertical, a solid sales base is built using the mid-level players who spend consistently. They won’t be the ones making you millions, but their average spending can be predicted and used as the ground floor for all your sales.
The jagged peak portion of this sales strategy is built by capturing consumer spending with the smaller players and the whales. These sales will more than likely be volatile and somewhat cyclical, causing your overall sales to peak and trough, much like a jagged mountain. But, if you have a base of recurring revenue in place, you can chase these sales with vigor, with the goal of transitioning them into your solid base with long-term deals and consistent value.
To picture this strategy, think of the movement of the S&P 500. If you look at it week-to-week, it’s extremely volatile, with as many losses as there are gains. When you zoom at it to look at a longer time period, however, the trend line is consistently increasing, however bumpy it may be.
The picture below shows a graphical depiction of the S&P over a 20 year period. For our purposes, think of the red line as your sales base, and think of the black line as the jagged peak of increasing and decreasing sales. The peak may rise and fall, but your base is steadily increasing and giving you a buffer that reduces sales volatility.
In my industry - mobile game advertising - we face this solid base and jagged peak every day. We have our whales, we have our consistent revenue generators, and we have one-off smaller players. For us, mid-level brand advertisers have consistent marketing budgets and can be relied on for recurring sales. The key is to lock these revenue generators into multi-month contracts that build a sales base. We do this by offering small discounts or creative advertising help in return for quarterly or annual contracts at set prices.
Additionally, locking-in your base gives you the chance to build case studies and testimonials that further your credibility and value.
This then affords you the opportunity to chase the whales, the spenders in your vertical that will thrust your jagged peak right through the business atmosphere. Atmospheric sales might not be sustainable, but over time, as you build rapport with these whales, you will convert more and more of their spending from a jagged peak into a solid base of recurring sales.
So, as business owners and aspiring entrepreneurs, owning a niche vertical is quickly becoming the prevailing business strategy. Don’t let volatility and cyclical sales cycles scare you off. As much as you want to mitigate volatility, where there’s risk, there’s an opportunity for a profitable business strategy.
By implementing the solid base and jagged peak sales strategy, you’ll end up lowering risk and increasing sales, all while building a massively successful online business. Not to mention building a life you love.
Check out my recent newsletters on the topic
