An alternative to being a follower in a large market is to be a leader in a small market, or niche, as we introduced in Chapter 8. Smaller firms normally avoid competing with larger firms by targeting small markets of little or no interest to the larger firms. Over time, those markets can sometimes end up being sizable in their own right, as Huy Fong Foods has found.51
SRIRACHA HOT CHILI SAUCE David Tran started Huy Fong Foods in Los Angeles’s Chinatown in 1980, naming the company after the Taiwanese freighter that brought him to the United States as a refugee from Vietnam. Based in part on a condiment made in Si Racha, Thailand, Tan’s Sriracha hot chili sauce is known as the “rooster sauce” for the distinctive rooster (Tan’s astrological sign) on its green-capped squeeze bottle. A unique combination of locally sourced jalapeno peppers, vinegar, sugar, salt, and garlic created a taste that his packaging suppliers thought would be too spicy. Tran refused to change the recipe, saying, “Hot sauce must be hot. If you don’t like it hot, use less. We don’t make mayonnaise here.” Fortunately, many consumers agreed. Huy Fong’s Sriracha sauce can be bought at Walmart and enjoyed in dishes at Applebee’s restaurants and in street foods in major cities. The product tastes so good that NASA has supplied it to its astronauts in space to help stave off dulled taste buds. It has never been advertised, has no Facebook page and no Twitter account, and at one point had not updated its Web site in years. Because of Sriracha’s popularity, however, Huy Fong has become one of the fastest-growing U.S. food companies. Success has attracted imitators, but the firm’s revenues continue to grow by at least 20 percent a year.
Firms with low shares of the total market can become highly profitable through smart niching. They know their target customers so well they can meet their needs better than other firms by offering high value, but they can also charge a premium price, achieve lower manufacturing costs, and shape a strong corporate culture and vision.52 The nicher achieves high margin, whereas the mass marketer achieves high volume.
Paul Reed Smith founded PRS Guitars to compete with big rivals Fender and Gibson and supply “the Stradivarius of guitars.” PRS instruments are carefully constructed of selected mahogany and figured maple, kiln-dried and sanded five times, followed by eight very thin coats of finish. They cost from $3,000 to $60,000, but endorsements from top musicians like Carlos Santana and distribution through well-respected retailers like Rudy’s Music Shop in Manhattan have helped the brand establish a foothold.53
Nichers have three tasks: creating niches, expanding niches, and protecting niches. The risk is that the niche might dry up or be attacked. The company is then stuck with highly specialized resources that may not have high- value alternative uses. Zippo has successfully addressed the problem of a fast-shrinking niche market
ZIPPO With smoking on a steady decline, Pennsylvania-based Zippo Manufacturing found the market for its iconic brass and chrome “windproof” cigarette lighters shrinking from 18 million units sold in 1998 to 12 million in 2011. With the writing on the wall, the company decided to broaden its focus to selling “flame,” warmth, and much more, reducing its reliance on tobacco-related products to 50 percent of revenue by 2010. Although an earlier attempt to diversify into tape measures, key holders, and belt buckles in the 1960s and 1970s had diminished in the 1990s and finally discontinued in 2007, Zippo came close to meeting its new goal. It introduced a long, slender multipurpose lighter for candles, grills, and fireplaces; launched an Outdoors Line including hand warmers and fire starters sold through Dick’s Sporting Goods, REI, and True Value; and acquired W.R. Case & Sons Cutlery, a knife maker. Zippo has even launched a clothing line and men’s and women’s fragrances as a way to become more of a lifestyle brand. The company still sells its fair share of lighters by promoting new designs as well as perennial favorites like lighters with Elvis Presley’s image and the Playboy logo. It now gets 60 percent of its sales outside the United States, with China the biggest foreign market at 10 percent of sales.
Because niches can weaken, the firm must continually create new ones. “Marketing Memo: Niche Specialist Roles” outlines some options. The firm should “stick to its niching,” but not necessarily to its niche. That is why multiple niching can be preferable to single niching. With strength in two or more niches, the company increases its chances for survival.
Firms entering a market should initially aim at a niche rather than the whole market. The cell phone industry has experienced phenomenal growth but is now facing fierce competition as the number of new potential users dwindles.
MARKETING MEMO Niche Specialist Roles
The key idea in successful nichemanship is specialization. Here are some possible niche roles:
- End-user specialist. The firm specializes in one type of end-use customer. For example, a value-added reseller (VAR) customizes computer hardware and software for specific customer segments and earns a price premium in the process.
- Vertical-level specialist. The firm specializes at some vertical level of the production-distribution value chain. A copper firm may concentrate on producing raw copper, copper components, or finished copper products.
- Customer-size specialist. The firm concentrates on either small, medium-sized, or large customers. Many nichers serve small customers neglected by the majors.
- Specific-customer specialist. The firm limits its selling to one or a few customers. Many firms sell their entire output to a single company, such as Walmart or General Motors.
- Geographic specialist. The firm sells only in a certain locality, region, or area of the world.
- Product or product line specialist. The firm carries or produces only one product line or product. A manufacturer may produce only lenses for microscopes. A retailer may carry only ties.
- Product-feature specialist. The firm specializes in producing a certain type of product or product feature.
- Job-shop specialist. The firm customizes its products for individual customers.
- Quality-price specialist. The firm operates at the low- or high-quality ends of the market. McIntosh Laboratory only makes high-performance luxury audio systems—its hand-built audio products appeal to audiophiles everywhere.
- Service specialist. The firm offers one or more services not available from other firms. A bank might take loan requests over the phone and hand-deliver the money to the customer.
- Channel specialist. The firm specializes in serving only one channel of distribution. For example, a soft drink company makes a very large-sized serving available only at gas stations.
Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.