Niche Selection Gone Wrong

May 2018

Hello Pricing Enthusiasts!

Springtime is certainly here, and with it comes beautiful greenery. The trees are green, the plants are green... Wouldn't it be great if your wallet sported a bit more green too?

Remember, it's never too early to start planting the seeds of increased profitability!

Pricing Question from a Reader

Hi Adam, I'm a web designer and it seems like everyone is telling me to specialize in order to earn higher profits. I decided to specialize in small nonprofits, since I come from that background. But now I'm having more trouble than before. Is there some part of specialization that I'm missing?

You're 100% correct that people treat specialization as a foolproof plan for small business owners. As you discovered, specialization does not always lead to business success.

In many ways, specialization is a lot like surgery. It can help in many ways when performed correctly, but it can cause a lot of damage when performed improperly.

While I congratulate you on your decision to specialize, I think that the focus you selected should be reconsidered. Sure, there are a lot of nonprofits with a lot of money. For instance, there are apparently 50 nonprofit CEOs making at least $300,000 each year.

That said, for every one of these nonprofits that is flush with cash, there are many more that are small, struggling, and just don't have the resources to spend on web design or the wisdom to understand the value of a proper website.

I typically start thinking about potential customers in two ways:

  1. Their ability to spend
  2. Their willingness to spend

If you're targeting small nonprofits, your potential customers will fare poorly by either metric.

Not only that, but they're probably not used to performing return on investment (ROI) calculations for services like web design. In fact, they may be so focused on the provision of their own services, that they lack any interest in making investments at all. As such, folks that you pitch may see what you offer as an unnecessary expense (or even a luxury) - leading to very low levels of pricing power for your business. In fact, you'll be competing not only against other professionals, but also against people willing to donate their time and services for free.

I'm not suggesting that you do away with your idea of specialization. Rather, I'd strongly recommend that you select a customer base that has desirable characteristics for your firm. If you'd like to specialize in helping a specific type of customer (there are other ways to specialize), you need to create a screening process. Here are a few questions you can pose, but it's hardly a complete list:

  • Is there something about the customer segment that makes it easier for you to address customer needs more than others?
  • Is the customer base more willing to pay than others?
  • Do members of the customer base share many similarities in terms of needs and desires?
  • Is it easy to demonstrate value to these customers?
  • Is it easy to get the attention of the customers?
  • Do the customers share a level of urgency for a solution?

I'm not saying that small nonprofits aren't viable sources of income. What I am saying is that there are other groups (both for-profit and not) that are far more willing and able to pay for your services.

Identifying the ideal customer base is one of the most important decisions that businesses make. Choosing well can lead to fortunes. Choosing poorly can lead to disaster. The selection process must never be an afterthought, or a selection made for dubious reasons. It's a central focus that will affect your messaging, the types of products you are able to sell, and (of course) the pricing power you will enjoy.

Questions come from readers like you. If you'd like your questions answered, send them my way.

♫This Q&A and many others are now available on the Pricing After Dark podcast.

Pricing in the News

From the Blog Archives

Notable Pricing Quote

"One man's wage increase is another man's price increase." -- Harold Wilson

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