GROW - MARCH/APRIL 2011
Entrepreneurs dream of huge enterprises. But in reality, the most successful small companies are often the ones that focus on a limited, but well-defined niche.
The founders of Smartsheet had a narrow focus when it launched five years ago: Give greater functionality and collaboration tools to people already using spreadsheets, like Microsoft Excel, for multiple uses.
“The thing I heard people say over and over again is, ‘I wish they would just put some work automation into a spreadsheet,’” says NFIB member Brent Frei, executive chairman and co-founder of Smartsheet, an online project management tool using a spreadsheet format.
Yes, it sounds like a narrow target market. But is that such a bad thing? The Bellevue, Wash., company, which now has 15 employees, sees benefits to targeting a special niche. Smartsheet, a subscription-based software designed for project management and work force collaboration, can be quickly adapted when users request new features or discover a glitch.
Smartsheet’s ability to concentrate solely on one product and fill a unique demand has helped it grow, Frei says. The company has secured more than $7 million in venture capital financing since its founding. Currently, Smartsheet has about 200,000 registered users and 5,000 paying subscribers. With hundreds of thousands of people already using spreadsheets for other tasks, it’s easy to expand its customer base as businesses encourage and train employees to use the Smartsheet software.
Start-up entrepreneurs and small business owners often have lofty dreams. They aspire to occupy huge target markets and offer a wide array of products or services. But there are risks to biting off too much. Trying to serve too many types of customers or offer a broad suite of products and services can stretch resources thin and make it difficult to stand out from the pack of larger, similar businesses.
Carving a specific, well-defined niche, on the other hand, gives small companies like Smartsheet a way to more effectively compete with big companies that can’t be as nimble, targeted or responsive, says Dennis J. Ceru, Ph.D., an adjunct professor of entrepreneurship at Babson College in Wellesley, Mass. A niche can be anything from a particular age group or geographic region to a specific target occupation or interest group. It’s the idea, he says, of spotting an opportunity that nobody else focuses on solely and then making sure the company offers a superior product or service.
“Focusing on a subset of the world at large creates a much more manageable opportunity and a much more manageable path to success,” he says. Instead of having to serve lots of different audiences, a niche business can become the expert in that one area—providing a big advantage over others trying to juggle across several.
Ceru points to bakeries. Some bakeries sell all types of baked goods, while others focus on a specific food, like artisan bread or cupcakes. The specialized bakeries only have to ensure that one product is the best it can be and they can focus solely on serving customers who buy that product.
Frei of Smartsheet says he started the company after founding a larger customer relationship management software provider called Onyx Software, which he ran for 10 years. Onyx Software was acquired by a bigger company in 2006 for roughly $92 million. He and his co-founders knew that many people were already accustomed to using spreadsheets for projects. But the major spreadsheet programs didn’t have easy-to-use project and task management features, so they felt there was an opportunity in melding them together.
Moreover, Smartsheet can be used to facilitate collaboration in businesses of all sizes and across industries. So even though it’s only one product, the potential customer base is large. “We’ve got a lot of runway,” Frei says. The company plans to continue making Smartsheet more valuable to businesses by creating templates specific to certain industries.
A while back, some users asked for more ability to attach supporting documents to the Smartsheet. The company was able to create and add that feature within six weeks. A big software maker juggling lots of different products would likely take months, if not years, to update a product, Frei says, because it has to manage priorities and faces more bureaucracy.
A Small But Mighty Brand
It may sound counterintuitive, but it’s often easier to build a well-known brand when your company’s focus is narrow.
NFIB member Michael Palumbos recently spun two specialized entities out of his family’s Rochester, N.Y., financial planning firm, PS&E LLC. One entity called Collaborative Family Office provides financial consulting to family-owned businesses while the other, the Donor Motivation Program, helps charities encourage donors to give more by holding seminars on the tax benefits of charitable giving.
Palumbos says his company receives media coverage more often than the general financial-planning firm because it is unique. He’s done several interviews with local reporters who are interested in his business or turn to him as an expert on family-business issues. Branding the business is easier, he adds, because he can more succinctly describe exactly what he does. “How do you tell somebody what you do when you’re a generalist?” he says.
Moreover, he finds running a financial planning firm that caters to one audience ultimately saves him time. Rather than trying to assist a wide range of clients—as a general firm must—his clients ask questions about the same topics and have similar concerns, so he can focus on being an expert in those issues. “My job is to just become an expert in everything family-business-related,” he adds.
Palumbos plans to eventually expand his family-business firm by adding more family-business consulting areas, such as incorporating family values into financial planning.
When it comes to spreading the word about your business, the evolution and fragmentation of Internet marketing also favors companies that are more specialized, says Dan Schawbel, a personal branding expert and managing partner of Millennial Branding LLC in Boston.
Indeed, it’s easier than ever to locate potential customers from a very specific demographic, location or with a very narrow need. The Internet is full of people searching with very specific terms to fit a need. Schawbel says social media platforms such as Twitter, Facebook and LinkedIn make it easy for businesses to identify their target audience and direct their message to that group using specific keywords and targeted ads. And these days, there’s a group for everything, making targeted marketing a snap.
Search engines are also friendlier to niche businesses. It’s hard to compete for general business terms—think “pet supplies”—but there’s far less competition for specific key phrases, such as “dog collars” or even “remote-controlled dog collars.” A more focused target market means your company is more likely to rise to the top of search results.
“There’s so much clutter out there on the Internet that being specialized helps you stand out,” Schawbel says.
Risks and Rewards
All the same, there are some challenges and risks that come with being in a narrow niche. Frei of Smartsheet says he must constantly follow the product news of big competitors like Google or Microsoft, which could potentially devastate his market by launching a similar product. Smartsheet has filed for patents on some of its technology, but that still doesn’t prevent some duplication of what it offers customers. There are always risks, he acknowledges, when putting all of your eggs in one basket.
It makes sense to differentiate by carving a niche when the market is crowded with similar types of general businesses, or when there’s at least a healthy demand for a specialized product or service. But a target market that’s too small can limit a business’ growth potential. Ceru says market research should examine the size of the potential customer base as well as how the business might someday expand. As businesses grow, they often need to broaden their niche or add new categories of products, services and customers.
Some businesses are in industries where it makes sense to couple various services together to better serve customers. Those businesses can still differentiate themselves, however, by offering superior customer service or targeting a specific demographic or geographic region.
NFIB member Steve Chepurny, president and owner of landscaping design and build firm Beechwood Landscape Architecture & Construction in Southampton, N.J., offers his clients an array of services from custom masonry terraces to exterior kitchens to sport courts and exterior lighting. He finds offering a full suite of services helps save his clients’ time—they can get everything they need in one stop.
But he still tries to differentiate his company by offering some new services that other landscape designers don’t, such as 3-D computerized design. Most landscape architecture firms still provide clients with hand-drawn designs, which take more time and can be harder to revise. Ninety-seven percent of the company’s work is computer-generated, and Chepurny uses hand-rendered designs only when they’re more impressive than the computer-generated ones. The software license costs him $3,500 per computer, but it gives him another marketing tool. Instead of serving a narrow niche of customers, “we try to be the innovator of new products on the market,” Chepurny says.