The Niche Audience Report

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?


The Niche Audience Report

How are companies launching and scaling with 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.

This is Part II of a series on how brands are starting and growing by targeting general audiences.

Even the most seemingly revolutionary products can fail if they are unable to engage an 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. If huge companies that already know their customers and have proven business models are having trouble with new products, new and unproven entrants must pay even more attention to how they are going after early adopters who often reside in niches.

Although the word niche often suggests a small and insignificant audience, targeting niche audiences early in a business’s life cycle is an increasingly popular strategy. For niche companies to succeed, they must garner the audience’s attention through their authenticity and relentless focus on the target they’re pursuing. Niche brands have an opportunity to cater to specialized interests and behaviors because the relatively small market allows them to serve an audience’s specific needs. 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 general markets.

This piece looks at niche business strategies and audiences, specifically:

  1. How can companies start and grow by going after niche audiences?
  2. Can niche brands target general audiences to keep growing?
  3. What challenges do niche brands face as they start targeting general audiences?

Launching into a niche market

Niche brands take advantage of whitespaces in the market, which helps to diminish risk. With advances in social and digital media, these brands can systematically reach different populations which maximizes the chances that their products will succeed. They can target people who are likely to be receptive to new products and who will pay premium prices for them.

Bevel

Tristan Walker started his holding company, Walker & Co., to cater to the personal care product needs of the underserved minority market, which has 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.

Companies that go for niche audiences can hit on very particular pain points and ensure that they get one thing right, which then gives them the space to focus on selling more product and evolving as a brand.

Growing niche brands

As niche brands continue growing, they eventually saturate the market by selling to most of their 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 don’t always hold as niche brands grow.

The Honest Company

The Honest Company introduced organic products to the baby and home consumer packaged goods (CPG) industry, which challenged legacy players. 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. Jessica Alba and The Honest Company team created a brand that has put pressure on traditional CPG manufacturers to make their products more eco-friendly and healthy in order to stay competitive. 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.

Although The Honest Company is rumored to be worth $1 billion dollars, it is struggling to grow. After initially focusing on direct-to-consumer sales, most of its new growth will likely come from wholesale. 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 did adventurous activities. GoPro was selling the experience of using the camera rather than 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 in the first quarter of 2014. This drew attention from the financial community and the company had an extremely large public offering and raised $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 is the result of an attempt to scale beyond its core market. In order to scale beyond athletes, the company must convince people that they need to use GoPro in their day-to-day lives. Yet 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. General markets are much harder to convince than niche ones. By attempting to scale beyond its core market, it 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.

Bonobos

Bonobos has faced a similar issue as it’s looked to continue to grow beyond its target audience and core value proposition. Bonobos originally grew out of the idea of creating a perfect pair of pants for the young and affluent buyer. When Bonobos launched, it had a very limited number of SKUs. But as it grew, their assortment ballooned to 1,308 SKU, according to EDITED. This is not far from J.Crew’s 1,630 options for menswear and Gap’s 2,303. This over-scaling caused the brand to lose focus and expand into too many products.

Niche brands that have successfully scaled

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 relying on investors to push growth and scale onto consumers, they have expanded their focus by co-innovating with their buyers and bringing them along for the ride. They act as leaders that larger audiences want to be a part of. Through this, shoppers begin to covet and co-identify with the brand. At the same time, the brand has the freedom to explore new verticals where they can make an impact.

Nike

When Phil Knight founded Nike in 1964, Adidas and Puma dominated the running shoe market. The company broke into the market by creating a groundswell campaign that targeted small running clubs that were blossoming throughout the country. His obsession with creating better shoes using Japanese fabrics slowly created a community of people that felt invested in his shoes and excited by 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, they started to think of the brand as different sub-brands they could market to these new audiences. Starting with Air Jordans, Nike shoes for other sports took off and created even more revenue for the company. They 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. 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, the CEO rethought his strategy. Since then, the company has reached $1 billion 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 its 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 they became “natural growers,” focusing on selling products that people want.

Although it is difficult to scale a niche brand into one that appeals to a larger audience, it is well worth the effort. The brands have endured and continue to be leaders in their fields. For Nike and Patagonia, this took decades. It took Nike 22 years to reach $1 billion in revenue and Patagonia has an estimated 750 million in revenue after 44 years and consistently takes home healthy profits. It takes the dedication to constantly focus on improving, the willingness to listen to customers, and the wherewithal to authentically expand to new audiences.

Wrap Up

Starting a brand using niche tactics is a prudent way to get off the ground by taking advantage of whitespace. However, niche brands can fail when they start to grow inauthentically and expand for the sake of expanding, leaving their core values in the dust. Companies that have successfully grown from niche to mass have kept their mission at the core and stayed true to themselves. They’ve taken their time to co-innovate with their audiences and found overlaps between their current and future audience, all to ensure that consumers want to associate with the brand as it becomes a larger lifestyle company. These companies have invited everyone in on the niche and successfully translated their value proposition into a larger, mass context.

The Cut Ticket

The Cut Ticket provides tactical questions that help you take action.

Brands

  1. What are the unique qualities of the niche you want to go after?
  2. Does it have enough loyal customers to sustain a business?
  3. How will you transition from a niche business to a mass business as you scale?
  4. How will your unit economics hold up as you make this transition?
  5. Will your products have the same degree of appeal to a mass audience as they do to a niche audience? Or do you need to change the product for it to apply more broadly?
  6. Is there something authentic you stand for that will garner attention for the brand as consumers look to authentic experiences?

Financial Investors

  1. Why did the company pick their niche? Do they truly understand it and have experience working in it?
  2. Are the unit economics in the niche scaleable outside of it? Or does the business unwind as it scales?
  3. Is the audience large enough to scale the brand or will the company need to move into different niches to keep growing?
  4. What makes this team best qualified to serve this audience?
  5. Does this audience have the dollars to support this brand?
  6. Are there competitors serving this audience or is the field wide open?


The Mass Market Audience Report

How are companies launching and scaling with general audiences?

Takeaway

  • Building for a general audience often requires companies to look beyond the coastal cities they are most familiar with. This means building for the 99%, not just the 1%.
  • Quidsi and Hollar, which target the general population, have grown by focusing on universal pain points that impact people regardless of location, which legacy brands ignored.
  • While going after a mass audience works for some time, eventually these companies need to segment their audience into niches and serve them differently.

Case Studies

Hollar, Amazon Prime, Diapers.com & Jet.com, Hilton, CB2, JCPenney, Sephora.

This is Part I of a two-part series on starting and growing brands through general and niche audiences.

Brands usually start by targeting a niche or mass audience. One is not better than the other, but each has trade-offs.

A niche audience is small and specialized. Catering to a niche gives a brand the opportunity to learn an immense amount of information by maintaining a personal connection with its customers. However, a niche brand’s potential scale is not always clear.

A general audience is large and broad. This might give brands less actionable information about each customer, but the potential scale makes up for the shallow amount of data. The path to reaching massive scale, however, is not always clear.

Because the Internet has transformed the ways in which brands can launch and grow, democratizing access to both general and niche audiences, what type of audience should brands start with?

This piece focuses on general audiences, specifically:

  1. How can companies start by going after general audiences?
  2. How can companies targeting mass audiences drive growth by serving new niches?

Starting with general audiences

General audiences gravitate towards brands with accessible products that provide wide-ranging value. If the product adds some marginal value—it’s a cheaper alternative or improves the experience—it has a solid chance of succeeding.

Thinking of consumers as one large group changes the strategy around a company, who must then think of its business model more broadly. Like pop songs and box-office hits, going after a general audience provides an opportunity to capitalize on the commonalities of a large population, giving a brand the opportunity to scale.

Building for the 99%

In the US specifically, the biggest audiences are not in the coastal cities (from which founders and VC’s tend to hail). Some call the targeting of these large audiences building for the 99%, not the 1%.

Hollar

Hollar, an online dollar store, started off by capturing a general market, namely, the middle-American buyers that Silicon Valley has traditionally underserved. The founder, former Honest Company VP David Yeom, came from a family that shopped at dollar stores in order to purchase goods in large quantities without having to worry too much about the price, a behavior that is prevalent in middle America. According to Yeom, the concept of a dollar store “suffers from some perception and stigma…but 80 million people shop at these places. When you talk about massive scale, that’s what this industry is all about.”

To meet this need, he started a company that focused on recreating the dollar store experience online—users scroll through the site and find items just like they would at an actual dollar store. Most of the items sell for $5 or less and no item sells for over $10. It worked to capture the general market—80% of the company’s orders come from outside of California and New York, a great example of a brand growing out of one of the largest cities in the U.S. to reach a general market. The company has grown quickly and is already creating its own private-label products based on its customers’ needs.

Sliding-scale pricing

Pricing on a sliding scale is another way to go after a general audience. The concept of giving a different price to different consumers based on their incomes is prevalent in regions like Latin America where the general population is split up into social classes that pay varying prices for heating, air, apartments, and other goods.

With such a large middle class in the United States, the practice of charging varying prices for the same good or service has been useful for some companies. In the past, amusement parks and museums have charged different prices based on different factors such as student status and retirement age. With the advantage of the Internet, it is possible to emulate this behavior in order to appeal to the public and become a company that the majority of the population can use.

Amazon Prime

For example, in response to different e-tailers reaching a cheaper and price-conscious audience, Amazon is now trying to get the general market to choose Prime. They’ve recently launched a discounted membership to shoppers on the Supplemental Nutrition Assistance Program (SNAP). With this, Amazon is luring discount shoppers online to their site and shifting their need to go to Walmart for the best prices ($1 out of every $5 from SNAP currently goes to Walmart). With 43 million Americans on the SNAP program, this could bring in millions of new members to Prime, which already boasts an estimated 80 million customers.

Diapers.com & Jet.com

Looking at mothers’ predilection and need to continuously stock up on certain diapers, entrepreneur Marc Lore started Diapers.com, which rewarded consumers for using his site to make essential baby purchases through discounts and seamless delivery options. The site became so popular that they initiated a price war with Amazon, who tried to undercut their price and created Amazon Mom, in order to take a piece of the pie.

His next company was Jet.com, which offered a 15 percent discount on its items, playing on people’s need for a discount rather than focusing on free shipping like Amazon. Even the 5 percent undercut on prices paired with an absent membership fee was enough to pull some consumers away from other companies. The site’s focus on the general market made a huge dent in the ecommerce space and became a quick competitor to Amazon, even when other companies like Walmart had been scrambling to catch up to the giant.

The companies mentioned above used a mass strategy to attract a general audience, scale up, raise millions of dollars, and ultimately become threats to other mass retailers. They’ve all fundamentally reinvented the concept of shopping for everyday consumer goods and have focused their attention on solving general pain points.

Amazon acquired Mark Lore’s first company once it started a price war, leaving Lore no choice but to sell. Walmart bought Jet for three billion dollars in cash, indicating Jet’s mass strategy paid off handsomely and led to a high valuation that brought money to its founders.

To grow, general brands go niche

Once a brand goes after a huge market, at a certain point it needs to break the market into individual segments to grow further. The shifting consumer landscape and differing consumer trends eventually necessitate a change in business strategy. Starting from general and then moving to a niche audience can be very powerful for brands that want to reach new audiences.

To realize the potential of niche audiences, general brands are adding layers to their targeting strategies by strategically thinking of people as part of different “personas,” “groups,” or “types.” Using a mix of art and science, brands seek to understand who their consumers (or potential consumer groups) are, and strategically target them by their passions, pain points, and behavioral needs.

One published example of a persona comes from Women’s Marketing, a beauty consulting company. It recently created a series of five distinct personas that reflect the female American beauty consumer. Using the nuanced information people provide through their digital media profiles, they came up with five groups: the Elemental, the Enterprising Mom, the Established Mom, the Passionista, and the Super Beauty. Each of these five personas looks at beauty in different ways and doesn’t need to necessarily align on specific shopping behavior, geography or social class. They have groups of overlapping attributes that make them fall into a certain persona. The Elemental might find herself drawn to the “the natural, woke-up-like-this look,” while the Super Beauty is “the go-to fashion expert among her friends and family” who also happens to like shopping alone. Brands can find these different personas by considering what type of information they’d like to find about consumers, competitors’ consumers, or specific people, and then analyzing information based off of this.

Hilton

As Airbnb starts taking market share from hotels, larger chains have started responding in kind by creating hotel concepts targeted to the Millennial consumer who wants different things from her hotel experience. For example, Hilton announced a new brand called “Tru by Hilton” in 2016. It centers around the premise of targeting and maintaining Millennial travelers. These hotels have a coworking vibe in the lobby and offer customizable breakfast options, wireless printing, and other amenities in exchange for smaller, more functional rooms. This might not appeal to older business travelers that want all the in-room comforts they are accustomed to, but it is a prudent way to reach adventurers and young travelers and compete with Airbnb and even hostels. According to Christopher J. Nassetta, president and CEO of Hilton Worldwide, Tru is “on the fast track to becoming our largest brand.”

CB2

Crate and Barrel launched CB2 in 2000. The store targets younger city-dwellers and features smaller items that fit in seamlessly with apartment living. The store is a minimalist and modern version of Crate and Barrel. Think airy Williamsburg loft vs. a classic Upper East Side apartment. CB2 started in Chicago and, since then, has moved into other urban areas like New York. It also features cheaper prices and funky styles, which helped refresh the company and brought new consumers into the mix.

Instead of making the general brand larger by using the same strategies and audiences as before, CB2 and even West Elm, a subsidiary to the more traditional Williams Sonoma, thought through their unique selling proposition to ensure that they continue to evolve as time passes, tastes change, and the dominant consumer also evolves. General brands that want to keep growing likely need to employ the same strategy.

Sephora x JCPenney

Legacy brands can also partner with smaller or more niche players in order to refresh their brands and join in on a niche space. Using strategic partnerships to attract niche shoppers can be a powerful strategy for large players who don’t want to change their whole business model or create their own new brands. For example, JCPenney brought Millennials into its stores by partnering with Sephora in its more upscale locations, which it has been doing for the last ten years. The company is now expanding its Sephora store-within-a-store concept to even more locations, which has increased the number of young shoppers. JCPenney stores with Sephora’s in them average more sales per square foot than those without them (over three times more at $500-$600 per square foot).

By focusing first on the mass market and increasingly targeting niche audiences, brands can add new layers and fresh thinking that ultimately reaches and engages more potential buyers than a general brand could have reached or captured on its own.

Wrap Up

Starting with general markets and then growing through niche strategies has its upsides. It’s possible to start by focusing on the commonalities of a large portion of the population. To keep scaling, brands eventually need to go after more specific niches by targeting specific behaviors. The ability to move between thinking broadly and specifically will only increase a brand’s value.

Part II will focus on starting with a niche strategy and eventually scaling it with general audiences.

The Cut Ticket

The Cut Ticket provides tactical questions that help you take action.

Brands

  1. If your brand targets a general audience, have you saturated the market for your products?
  2. What niche audiences are logical evolutions for you to drive growth?
  3. Are you able to reach these new niche audiences with your same product assortment, or do you need to develop new ones?
  4. What audiences could you go after that your company is uniquely poised to compete for?
  5. Do these new audiences require you to master new acquisition channels or use your existing expertise?
  6. Will these new audiences continue growing over time or are they flat or shrinking?

Financial Investors

  1. Why did the company start with the audience that it did?
  2. Does the team have domain expertise in the space and/or are they the target customer?
  3. Will this audience continue growing over time and can the company continue reaching this audience as it scales?
  4. How will the unit economics scale as the company grows? What ensures they won’t turn negative or become wildly less profitable?
  5. Is the company only going after consumers that are “like them,” or are they thinking through which other audiences they can target?
  6. Is the company using sustainable sales channels? Are there macro concerns that costs will continue rising?
  7. How capital intensive will it be to scale this business to a general audience and then to various niches?


The Rental Economy Report

How are companies taking advantage of the rental economy?

Takeaway

  • Rent the Runway dresses are rented around 30 times at prices ranging from 10-20% of their retail price. Renting allows them to gross 3-6x the price of each item, compared to a one-time purchase.
  • Retailers are taking notice of the successful rental partnerships Nordstrom and Neiman Marcus have established with the Black Tux and Rent the Runway, which are bringing younger shoppers to their stores.
  • Renting does not need to diminish brand value or exclusivity, which is best maintained by keeping the associated brand and its aesthetics intact.

Case Studies

Rent the Runway, The Black Tux, Le Tote, Uber.

Audio Edition

The move towards sharing and using instead of direct ownership is often called the Sharing Economy. People are increasingly comfortable using items that others have used before. Specifically for younger populations, owning seems like an expensive burden they don’t want to take on when they can just rent something for a fraction of the price without having to make a lasting commitment. Why buy a ton of movies and songs when they can just be streamed or rented from a large library for a flat, monthly fee?

It is now cheaper than ever to own a proliferation of material possessions and having a ton of “stuff” is no longer a good sign of adulthood or considered evidence of middle class status. Instead of having pride in being a family that owns two cars or a large house, millennials place higher value in having an engaging and fun lifestyle. More than that, people are now aware of the process that goes into making this excess of material goods and concerns about the environment, international worker rights, and not finding fulfillment among their possessions has guided people to feel more secure in buying less material goods and renting more often.

The rental model is most common as a viable business model for cars, homes, machinery, and other highly durable items. While Mom & Pop tuxedo companies and the mass market “Men’s Wearhouse” have traditionally rented out tuxes to men in the past, the rental market has been rather limited within fashion and apparel otherwise. In the last few years, however, renting has taken the fashion market by storm as it becomes a relatively new way to sell consumer goods.

This piece explores the pillars, benefits and pitfalls of a rental model for consumer goods companies. As more brands explore implementing renting as either a core part of their business or as an experiment, there are a number of important factors to pay attention to.

The core of the rental model

Determining the viability of a rental model comes down to three main factors: 1) how durable the goods are; 2) how many cycles the products can last for; and 3) what is the best way to make money from the products. Companies must also take consumer behavior into account and ensure that there’s a group of people that are willing and able to rent out their products.

Durable goods

Durable goods are crucial for the viability of a rental business model, and are often defined as items that can last three years or more. With fast-fashion brands having a hegemony over young-adult fashion, clothing as a durable good has taken a backseat as consumers purchase more disposable apparel products instead of investing in lasting pieces. When renting out a fashion item, however, the item must be a durable good that could be used multiple times and by multiple people, much like fine jewelry or quality leather jackets.

Interestingly, when asked about their perceptions of products, both Millennials and Generation X’ers choose “durable” as the word that described high-quality products best, followed by premium, craftsmanship, and luxury, according to Mintel. The connotation of high quality given by the word “durable” suggests that people aren’t only attracted to high-status luxury items for their closets, but they also want fashion items that are strong and long lasting. This helps to explain why a market exists for retailers like Everlane and L.L Bean, whose most recent commercial strongly intimated at their quality guarantee with the voiceover stating: “When did we stop valuing things to get better over time? When did disposable become our default?”

Promoting the long-lasting and strong, quality materials that clothes are made of has proven viable because consumers are starting to become “ingredient-focused.” In the same way that some consumers want to know every ingredient and process that goes into the food that they consume, many are starting to take this approach to fashion and turn their nose up at the artificial materials and cheap fabrics many clothing items are made of. Fast-fashion retailers can’t play in the space for durability and therefore quality, where the material that an item is made from is less important than the trendiness of their pieces.

In the rental space, Rent the Runway Unlimited and Le Tote have started to promulgate a revolving closet of quality clothes that people can pay a monthly fee to access. The goal is to give every consumer a huge closet of high-quality clothing they can wear year-round. However, these services have yet to become mainstream. There are some consumer pain points that they haven’t figured out how to solve yet such as keeping quality high, finding the ideal number of outfit rotations a month, and increasing adoption rates. There is still space for high-quality items to get consumer attention, especially if brands can show that their products are durable and good investment pieces.

Depreciation

Depreciation is the second important factor in a rental business model. Brands must strategize around how quickly an item will go down in value after being used by multiple people, and if its value will stay flat or even increase with time.

While renting and leasing cars is known to bring the value of the product down the moment someone drives off the lot, and then every day after, renting out music and digital goods is absent from this classic deteriorating process. The internet unleashed the premise that digital goods can scale infinitely with zero marginal costs. Netflix, at a high level, benefits from this reality. The shows it produces in-house have a fixed cost and then can scale globally.

The depreciation on high-quality fashion goods falls somewhere in between digital and traditional physical goods. For most consumers, it is often difficult to tell how many times an item has been used or worn since there is no definite way for the consumer to count. Companies that rent out clothing or fashion items don’t usually reveal this information and consumers usually don’t demand it. With no mile reader, these items must retain their quality by being durable to begin with, undergoing successful dry-cleaning processes, and being cared for by the people that rent them. The more an item retains its value through the rental process, the more times it can be rented out while commanding high rental prices.

With Rent the Runway, for example, the number of times a dress has been worn isn’t shared with the consumer, creating the ability to rent at the same price throughout the process. The average Rent the Runway piece goes to customers around thirty times before it is sold at a sample sale and deemed too used to be rented out anymore. Rent the Runway goes through extensive dry cleaning processes, hiring only the best “spotters,” who are paid upwards of $30 an hour, to clean the clothes and make sure they don’t depreciate in value or someone that rents the dress spots something on it that they don’t like.

Extracting Value

While the rental model might not work for cheap, commodity items like socks and t shirts, it holds promise for more durable and lasting goods. As such, there is a chance to extract more value from it using different marketing techniques and business models.

Renting or selling a used item creates a new market for people who aren’t willing to pay full price or are more price sensitive than those who purchase new and shiny full-fledged products. For example, durable goods such as the latest smartphones are usually sold to the relatively small population of people that are willing to pay their full retail price. Then, when a newer item comes out, these items are sold by the original purchasers in a secondhand, open market where people willing to pay less than full-price can purchase them. This not only puts products into more hands but also incentivizes the original purchasers of the phone to upgrade to the newest model. Original purchasers can offset the price of their new phones by selling the old phones to more price-sensitive consumers and then buy an expensive, new product, ultimately putting more money into the company’s coffers.

Renting out fashion products has this potential to extract extra value from items that either the least price sensitive consumers have already used or that people who are willing to pay less can use. Rent the Runway dresses are typically rented at prices ranging from ten to twenty percent their retail price and as mentioned above, are rented out about thirty times. This indicates that RTR can stand to gross three to six times the price of the item if purchased at full price. After this cycle is completed, the brand then sells the pieces at sample sales or on their website, garnering even more value from them. With the right rental model, margins and topline revenue can be much greater than selling wholesale and even direct to consumer in one-off transactions.

Similar to low price schemes used by the likes of Uber to hook people to their app, renting out fashion items has the potential to increase brand affinity, awareness and topline sales. When Uber puts out a new service like uberPOOL or uberCOMMUTE, they start by charging a very low price that makes it easy for people to choose to use the new service. After people use it a few times or for a few weeks, some people become reliant on the service and stick with it even if the price goes up, which even chips away at the price sensitivity for some as the app becomes part of their routines.

By charging less for a fashion brand via renting, a brand can resonate more as it reaches a larger number of people who now have the chance to experience it first-hand, in addition to noticing how they feel and look when they wear a higher quality item. The more they wear and rent from a certain brand, the less likely some people are to be satisfied with the low-quality goods, which are a constant threat for middle and upper market brands today. Similar to how Uber can make people feel like getting on the subway or walking home seem like a chore once they’ve gotten a taste of the good life, shoppers can grow familiar with wearing high-quality brands, which can extract more value from the products in the long run.

Benefits

While purchasing online, showing pictures of regular people wearing luxury goods, and renting fashion items might have been unheard of in the past when luxury goods were meant to be the pinnacle of fashion and exclusivity, new behaviors and ways of thinking have entered the consumer conscience. This is unearthing possibilities for new business models that can be both viable and profitable. When surveyed where they purchased their first luxury goods eighteen to twenty four year olds were the most likely to have made their first luxury purchase online, by far the highest percent of people sampled at fourteen percent, according to eMarketer.

With Nordstrom and Neiman Marcus starting partnerships with the Black Tux and Rent the Runway respectively, retailers have spotted something in the rental and digital-first model that can help out their businesses. Both retailers are trying to get younger shoppers into their stores as the average Rent the Runway and Black Tux consumer is twenty nine, much lower than their current shoppers. These partnerships and forays into renting are helping stores become more relevant to the younger set as they start competing with digital-first companies and other more-relevant stores.

Renting can also be a tactic that brings potential buyers closer to a brand. Retailers that have traditionally used cheaper items in their lines like phone cases, coin purses, or key chains to get their brands on the radar of younger consumers can use renting as a similar tactic, getting the brand into the hands of people who wouldn’t have purchased the item otherwise and upping brand recognition and even future sales. Instead of trying to ladder up to the core brand using these cheaper items, renting allows brands to cut to the chase and have consumers experience their brand in its pure form. According to the founders of Rent the Runway, they had to explain to the designers they were working with that renting wouldn’t take away from their own sales but rather, they would be competing with fast-fashion retailers like H&M and Zara that these younger consumers were buying their dresses from. In this way, renting out items gives new life and opportunity for these brands.

Pitfalls

While there are lot of benefits and untapped opportunities with renting, there are some challenges that brands need to control for. Having a brand try out the rental model can result in changing consumer expectations, something that can be dangerous for brands if not treated correctly. Expectations on the future price of a product play a large part in a customer’s decision to buy or rent out a product, according to Duke business professor and rental-market expert Debu Purohit. The brand must ensure that the consumers who are willing to pay the retail value of a product aren’t stopped from doing so and that renting itself is not a discount, but a new way to try and purchase items. This is a thorny issue that retailers often deal with when thinking about their sale and coupon cycles. Brands must be careful to ensure consumers that the price of their products will remain high so that consumers don’t think they are getting a bad deal and convince themselves to forgo their purchase.

It is also important to think about the timing of when a product comes into the rental market. Renting out items as soon as they hit the runway might not be prudent for a brand that wants its consumers to retain a sense of urgency for purchase. Alternatively, there is also the possibility of giving out the most exclusive items for rent, so that multiple people can experience it at first before there’s a chance to mass produce them. According to Karen Katz, CEO of Neiman Marcus Group, “part of the problem (of sales going down) is the desire of shoppers to buy what they see on runways or written up in blogs right away, rather than the months it takes for such clothes to get to stores”. This is similar to the thought movie studios have to put behind the “windowing” process, when they figure out the right timing of when a movie is released first in theaters, then to video on demand, and finally to Netflix and iTunes and how consumers are starting to grow more impatient as they can’t immediately see a movie that was out in theaters on their Netflix accounts. Brands need to navigate these changes when exploring the rental model, which is entirely possible with explicit consideration of the possible challenges.

Wrap up

As renting continues to become part of the business models of new and mature brands, it’s important for companies to go back to the fundamentals of the renting process in order to ensure that items remain valuable and the business remains profitable. Companies must also explore how they can take ideas from other profitable industries (like the tech industry) to create strong brands that attract consumers of all ages. Finally, they must adapt to the changing consumer conscience where sharing is okay and owning a multitude of items is no longer considered tantamount.

The Cut Ticket

The Cut Ticket provides tactical questions that help you take action.

Brands

  1. Think about your brand, its core customers, and customers you would like to have in the future. How would the rental model get your brand closer to this audience?
  2. Map out all of the brands and product categories that exist within your company. Does creating a new place for young adults to come in contact with your brand make sense, or could it be incorporated into your existing offering?
  3. What is the level of depreciation of the items that you sell? Can you extract extra value from any of them by renting them out or doing different things with them?
  4. Could renting replace sales or excessive markdowns?
  5. How do you currently get more price sensitive consumers introduced to your brand? Can you create a process that makes their price sensitivity decrease after continued use?
  6. What are the biggest barriers for consumers utilizing your brand? Can getting closer to rental models fix any of these barriers?
  7. Can you partner with any rental companies that can bring a larger audience to your retail store, learn from them, and then launch your own model in due time?

Financial Investors

  1. When looking at a company with a rental model, how are they planning to keep their items in top notch condition?
  2. What processes are they using to do this and how could they affect margins?
  3. How is the company branding their rentals? Are they ensuring that the consumer feels like the items are upmarket, clean, and durable? Or does the branding and imagery give a poor connotation of the quality?
  4. What logistical processes do the companies have in place? Do they seem good enough to successfully rent out their items and scaleable over time? Is the team known for their logistic expertise?
  5. What is the turnaround time for each items that gets rented when it comes back to the warehouse? Is the brand extracting enough value from each piece?
  6. Has the company built a community of people that care about the items they are renting and are inclined to respect the quality of the pieces?

Real Estate Investors

  1. How could you fill existing vacancies with rental-based stores and fulfillment centers?
  2. How could renting, which shoppers interact with much more frequently than normal transactional buying, boost both the amount and frequency of foot traffic?
  3. If tenants offered renting, how could you make the experience easier for shoppers by integrating parking, drop off and pickup?
  4. What additional infrastructure do you need to make renting possible for your tenants?
  5. Are there ways to bundle existing commercial square footage for renting operations alongside retail square footage to give companies the infrastructure they need to make renting a success?
  6. Could some of this infrastructure be shared among multiple tenants or a competitive advantage to attack new tenants?