The Niche Audience Report

Executive Summary

Even the most seemingly revolutionary products can fail without an engaged audience. According to Harvard Business Review, American families repeatedly buy the same 150 items for their household needs. Getting shoppers to consider a new product is difficult. Even well-known names like Apple, Nike and Lululemon have trouble introducing new products into the marketplace.

Although the word niche often suggests a small and insignificant audience, targeting a niche early on in a business’s lifecycle is increasingly a go-to strategy. For these niche companies to succeed, they must garner the audience’s attention through their authenticity and relentless focus on the target they’re pursuing. But from here, growing the business further by thinking through the potential scale of niche products can sometimes be a challenge as niche brands move into mass markets.

This report looks at:

  • What’s happening with niche audiences and why does it matter for the larger consumer ecosystem?
  • What do these success and failures mean for brands, investors and real estate developers?
  • What should brands, investors and real estate developers do to harness the powers of niche audiences?

Takeaway

  • Niche brands that cater to audiences with specific needs have an easier time finding and engaging the right audiences early on.
  • But when niche brands need to grow beyond this initial audience, they need to evolve their offering without unspooling the fundamental economics of the business and the strength of the brand.
  • Brands that have successfully scaled from niche to general audiences have kept their initial adopters engaged while successfully translating their value proposition into a larger, mass-market context.

Case Studies

Bevel, The Honest Company, GoPro, Bonobos, Nike, Patagonia.

What’s happening and why does it matter?

Successes: What happens when niche brands intelligently scale?

The most successful niche brands have scaled by creating value-driven companies that consider their defining characteristics and become meaningful parts of consumers’ lives. Rather than solely relying on investors to push growth and scale onto consumers, they have expanded their focus by co-innovating with their shoppers and bringing them along for the ride. At the same time, the brand has the freedom to explore new verticals where it can make an impact.

Nike

When Phil Knight founded Nike in 1964, Adidas and Puma dominated the running shoe market. Nike broke into the space by creating a groundswell campaign that targeted small running clubs that were blossoming throughout the country. Knight’s obsession with creating better shoes using Japanese fabrics slowly built a community of people that felt invested in what he had to offer.

By focusing on constant innovation and listening to customers, the company grew from this niche and started to sell to a general audience by translating its message to the wider public. Nike began by selling shoes to runners and experimenting with which product innovations were useful to this audience. To successfully market to players of other sports, it started to think of the brand as different sub-brands it could market to. Starting with Air Jordans, Nike shoes for other sports took off and created even more revenue for the company and the brand soon moved on to shoes for tennis and football. When Reebok came out with its general fitness and aerobic shoe and took a large chunk of that market, Nike responded by creating a fitness line of its own. At this time, the company took on a more general ethos. According to Nike co-founder Bill Bowerman, “If you have a body, you are an athlete”.

Nike eventually became a lifestyle brand by continuing to expand its messaging and finding overlaps between its consumers. The company’s target audience evolved from hardcore athletes to people who liked sports because of marketing taglines and imagery. For example, its famous “Just Do It” campaign expands beyond the core motivations of hardcore athletes into the ones of would-be athletes (who need that extra motivation to start an exercise regimen). But this took many decades to pull off, evidence that there are no shortcuts to building a true lifestyle brand, which is earned, not bought.

Patagonia

Patagonia has gone through a similar life cycle, starting off as a rock-climbing accessory store, transitioning to a Rugby-shirt selling brand for rock climbers, moving on to other outdoor sports, and ultimately evolving into a lifestyle brand. It went from an alpine-focused company to selling outdoor clothing for a variety of activities including surfing and swimming.

Patagonia is a great example of a company that hasn’t sold out and continues to keep customers engaged. Although it ran into trouble in the 1990s and had to file Chapter 11 bankruptcy after over-scaling, founder Yvon Chouinard has since rethought his strategy. Since then, the company has reached $750 million in sales by staying true to its ethos and focusing on durable and simple clothes, great customer service, and a people-and-planet-friendly attitude. It uses sustainable materials, offers free clothing repairs, and provides excellent worker benefits.

The company has unapologetically stuck to its focus on sustainability, recently creating a campaign where it touted its brand’s durability and focus on the environment by selling items on Black Friday with tags that read “do not buy this jacket” in order to encourage people to keep using their clothes for as long as possible instead of purchasing needless items. Interestingly, this campaign resulted in an increase in Black Friday purchases for the company.

The company’s relentless push on quality, durability and its mission has fueled its success and it’s all been possible because of its non-reliance on investors. Patagonia has focused on growing intelligently. Instead of growing superficially, it became a “natural grower,” selling products that people want.

Failures: What happens when niche brands go astray?

As niche brands continue growing, they eventually saturate the market of early adopters. From here, these brands have to look at expanding outside of their niche into new products, markets or customers. This presents a challenge. The underlying fundamentals that make the brand successful early on don’t always hold as niche brands grow.

The Honest Company

Jessica Alba and The Honest Company team created a brand that has put pressure on traditional CPG manufacturers to make their products eco-friendlier and healthier in order to stay competitive. The company bet that these niche products—fragrance-free detergent, organic diapers, and plant-based cleaning supplies—could be attractive to a larger market than originally thought.

At a macro level, the top 25 companies’ share of U.S. food and beverage sales have shrunk since shoppers have been turning to smaller brands, with $20 billion in market share value transferred from big CPG companies to long-tail brands in the last six years. This trend should be promising for companies that start by serving niches such as The Honest Company, but creating a stable foundation to ride this shift is challenging, especially when a company has raised over $220 million in venture capital. This money and the associated expectations forced the brand to rapidly scale at all costs.

Although The Honest Company is rumored to be worth $1 billion dollars, it is struggling to grow. After initially focusing on a subscription offering and then direct-to-consumer sales, most of its new growth will likely come from wholesale. This will significantly impact projected margins, which are already thin for CPG products. The company has recently laid off workers, switched CEO’s, and has struggled to maintain its natural ingredients. Using niches to challenge an incumbent is one thing, but doing so profitably at scale is another. Brands moving from niche to broad audiences need to pay careful attention to their underlying unit economics and constantly project how targeting different customers changes the equation.

GoPro

GoPro initially found success by building a camera that captures the authenticity of adventurous pursuits. The early success drew attention from a larger audience than the brand initially targeted. Regular people, not just pros, started using the camera whenever they embarked on adventurous activities. GoPro was selling the experience of using the camera, not just the camera itself. The company’s strategy involved uploading adventurous videos online that showed users doing exciting things with the GoPro camera, a tactic that resulted in people watching over 50 million hours of videos where the word “GoPro” appeared as of 2014. This drew attention from the financial community and the company had an extremely large public offering, raising $427 million at a valuation of $2.96 billion.

However, GoPro suffered a big setback when it tried and failed to turn into a media company. This turbulence was the result of an attempt to scale beyond its core market. In order to build a successful company that catered to more than just athletes, the company had to convince people that they needed to use GoPro in their day-to-day lives. General markets are much harder to convince than niche ones. With the iPhone as the most successful camera in the world, GoPro remained a niche choice. If someone was going to carry one camera with them, it would likely be their phone. By attempting to scale beyond its core market, and funding the company on a level that gave it no choice but to keep growing, GoPro began to dilute its brand and its original value proposition. GoPro’s only path to growth was to spend more money to attract increasingly-less relevant customers.

Works in progress: Companies that are experimenting today

There is a new crop of companies coming up who target supposed niches such as Dia&Co, Eloquii, Blowbar, and Peter Manning. They focus on markets that have been previously underserved or underemphasized. At the same time, they are bringing more logic and patience to their growth strategies. One of them worth looking more closely at is Bevel.

Bevel

Tristan Walker started his holding company, Walker & Co., to cater to the personal care product needs of the underserved minority market, which has traditionally been relegated to the “ethnic aisle.” He launched his first brand, Bevel, which featured a single-blade razor system specifically created for ethnic men who tend to have coarser and curlier hair. He reached these consumers by first focusing on black barber shops and partnering with them so they received a commission when someone purchased a Bevel product, and then moving on to other small channels like niche podcasts. Most of the company’s growth has since come from word of mouth.

Specific communities are likely to pay attention when a brand builds a product or service just for them. At this point in the brand’s life cycle, the initial target audience is very receptive to on-brand messaging if the product meets their specific needs. Therefore, it’s cheaper and easier to market to niche audiences.

Walker struggled to find funding when he first started the company. The mostly white investors he spoke with didn’t instinctively understand the need for his product. However, Walker was able to initially procure $3 million and, by demonstrating that his was an important and underserved market, he recently raised $24 million. In 2014, subscriptions grew at an average of 50 percent month over month with more than 90 percent of consumers deciding to return. “The changing demographic in this country is the greatest economic opportunity of my lifetime, there’s an inevitability to this, and I think some of the greatest companies that will be built in the next 50 years will keep that in mind,” Walker says. As the company continues to grow, sales in 2017 are up 200 percent from last year, evidence that it is among the fastest growing new razor brands.

Walker and Company is going after a group of consumers that are far from a niche. There are over 50 million men and women who fall directly into the markets Walker and Company is serving, let alone the millions of others who can still gain a lot from their products. While the company has raised over $33 million in funding, it’s growing at a healthy pace and in a manner that sets it up to exist for the decades to come.

More recently, Bevel has moved into wholesale relationships with Target and Amazon. Walker and Company also launched FORM, its first brand for women that is focused on hair care for women of color. FORM also launched online and with Sephora, an important early partnership for the brand that still shows the power of both wholesale and retail. Interestingly, the Bevel shopper and the FORM shopper are often either related, in the same household, or in the same friend circles, which creates a virtuous marketing funnel where shoppers from each brand recommend the opposite brand to each other.

What does it mean for you?

Brands and Retailers

For brands and retailers that are looking to expand from their initial niche, it is important to authentically attract a wider range of consumers. Expanding for the sake of expanding and leaving core values in the dust is dangerous. Brands run the risk of becoming diluted and inauthentic.

There are a few key areas to pay attention to

  • Niche brands that hope to later serve mass audiences need to fund themselves in a rational manner. Taking on too much funding early on, which sets premature growth expectations, is a recipe for a short-lived brand. Instead, funding a brand in parallel to the initial opportunity ensures the company has the cash it needs to grow and expectations it can deliver on.
  • Niche brands also need to pay attention to the size and the scalability of the niche they first serve. The best niche brands have the ability to grow and evolve their existing offering for an increasingly larger audience, rather than completely restart their initial strategy. Niche brands need to be able to naturally transition from serving niche audience needs to mass audience needs, without alienating either constituency.

Investors

Investors need to know if a niche product or service has the potential to resonate early on, in addition to growing and scaling down the road.

  • Investors need to have diverse talent in their firms to help them better evaluate opportunities and invest in companies that not only cater to the coastal elite but also take into account the deep insights on niches. Investors should be the customers of a wide variety of products and brands.
  • Investors need to put realistic growth expectations on niche brands that allow them to continue supporting their early adopters while increasingly serving a wider audience. Growth for the sake of growth hurts a brand’s early supporters.
  • Investors need to pay extreme attention to the unit economics of different cohorts, especially around customer acquisition. Most brands are able to acquire customer relatively inexpensively early on, but these costs can significantly rise over time, sometimes resulting in negative unit economics. This should also be considered in early funding rounds.

Real Estate Developers

Niche audiences can bring fervent supporters into stores who may stick around for more. Real estate developers have a number of opportunities to leverage niche brands and audiences:

  • Real estate developers can make space for niche brands who will bring high volume and high affinity shoppers into stores. This will bring residual brand equity for retailers and increase their relevance, making it more probable that younger and wealthier shoppers set foot on the property. An expanding roster of newer brands will keep these shoppers coming back, as they will know that this property is always bringing in new and exciting shopping experiences, increasing foot traffic along the way.
  • Many of these new brands rely heavily on events to drive foot traffic. Providing them space and letting them tap into your existing infrastructure could create some interesting co-branding opportunities and continue driving foot traffic.
  • There are also opportunities to work with these brands to create special products that are only available offline, driving foot traffic to the property.
  • Real Estate developers should experiment with marketing that brings attention to the benefits of having these upcoming, niche brands within their walls. This will create initial excitement among consumers who are already visiting and are hoping for novelty and ensure practical shoppers stay inside the property for an added sense of joy and discovery.

What should you do about it?

Although it is difficult to scale a niche brand into one that appeals to a larger audience, it is well worth the effort since these brands have endured and continue to be leaders in their fields. For Nike and Patagonia, this took decades. It takes a constant focus on improving, the willingness to listen to customers, and the wherewithal to authentically expand to new audiences.

Brands

  1. How can you find and support niche audiences that are relevant to your mission?
  2. How can you figure out the number of loyal customers these niches have and if it can sustain a business? Could you combine multiple niches together that could be similarly served?
  3. Is is possible to reach a general audience in the beginning or is there a niche need inherent to your business model?
  4. How will you transition from a niche business to a mass business as you scale?
  5. How will your unit economics hold up as you make this transition? Which unique type of customer acquisition tool can you use to reach this audience sustainably?
  6. How can you determine if your products will have the same degree of appeal to a mass audience as they do to a niche audience? Do you need to change the product for it to apply more broadly?
  7. What are the short-term and long-term profitability implications of scaling from a niche or beginning a niche strategy?
  8. How can you position yourself for long-term loyalty for both niche and mass audiences?

Financial Investors

  1. Why did the company pick their niche? Do they truly understand it and have experience working in it? What expertise can your bring to it?
  2. How will the unit economics in the niche scale outside of it? Does the business unwind or strengthen as it scales?
  3. How will the niche audience grow as the brand scales? Will it you need to move into new niches to keep growing?
  4. How can you determine if the team is best qualified to serve this audience?
  5. How can you measure if the audience has the dollars to support this brand?
  6. Which competitors are already serving this audience? Is the field wide open? How will this competition affect the brand’s growth?
  7. How will the brand find other pockets of your initial niche audience as you begin scaling?

Real Estate Developers

  1. How should your properties attract shoppers who are used to shopping online for their preferred brands? How can your properties use this information to tweak their marketing strategies?
  2. Where do relevant niche audience, which are proximate to your properties, live and spend their time? What are their hobbies? How can properties become seamless parts of this audience’s life?
  3. How should your properties approach their mass market marketing strategies after adding niche stores and more unique brands into their assortments?
  4. What does a post-internet-era mall look like that caters to mass and niche audiences?
  5. If you are going to allow niche brands to open on your properties, what differentiates the new customer base from your existing one? Where do niches audiences shop? How can your properties strategically put stores in the right locations for these niches as you scale?
  6. Are there any larger retailers the niche brands in your property can partner with to set up store-within-a-store spaces that will help spur initial sales? How can you facilitate this?
  7. What existing real estate concepts can you use for your properties? Is there anything more experimental you can do to bring more unique tenants into your properties?