Starting a Business in a Crowded Market

Research the industry and customer expectations. Then define your business as narrowly as possible and get to work establishing your expertise

I'd like to start a business in an industry that already has a lot of established competition. Is this foolish, or are there always small niches that need to be filled, even in a crowded field?—S.W., Honolulu

Just because there is no one selling a particular product or service doesn't mean it's automatically a good idea to try. Conversely, a competitively crowded industry shows that demand exists, as well as a viable market. The key to business success isn't finding an empty field, but defining your company narrowly—no matter how crowded a marketplace you're entering.

There are many ways you can differentiate your company, says Reid Carr, president of Red Door Interactive, a small Web development firm based in San Diego. "You can choose to sell to different people, such as small businesses; you can find new distribution channels; you can stratify the industry's price points by introducing a luxury class; or, you can redefine your selling proposition," he says, noting how Starbucks (SBUX) revolutionized the coffee shop by selling an experience rather than just a beverage.

Look for Industry Change—and Act

However you choose to be different, you must be great at the basics and exceptional at your defining factor, Carr says. "The key here is to know who you are and who you are not." Another way to get a toehold in a mature market is to watch for change or stagnation in that industry and capitalize on it. "Even in highly competitive industries—perhaps even more so than in noncompetitive markets—there are external and internal market forces that will create change in the dynamics," says Eric Basu, president and CEO of technology firm Sentek Consulting in Mission Hills, Calif. "Successful companies and entrepreneurs aspiring to enter a competitive market will observe the winds of change and seize opportunities arising from changes. A successful entrepreneur will often have prepared for entry into the industry by securing capital, establishing connections, possibly occupying a sentry position, and otherwise laying the groundwork for opportunity."

Jason Prescott, chief executive officer of JP Communications, noted a changing industry dynamic and found a specific niche when he launched, a vertical search-engine network that provides retail buyers and online auction sellers with access to premier wholesalers. "While search giants like Google (GOOG), Yahoo (YHOO), and MSN (MSFT) are better known, they have certain shortcomings that prevent wholesale suppliers and distributors from being as successful as they could be online," Prescott notes. "Among them include a lack of relevancy for business-to-business companies, since these search engines are largely geared toward the consumer market. The Googles of the world are also not experts in the wholesale industry, and do not aggregate valuable industry information as a result."

While many of his potential customers do use the better-known search engines because they don't know they have other options, tailoring a specific solution that fits their unique needs has paid off, Prescott says: "We now have 1,200 active advertisers in the wholesale community and reach close to 30,000 retailers every day."

How do you find an underserved niche for your business idea? Know your customers and their expectations, Carr says. "Discover their baseline needs or expectations to be considered and make sure you cover those as well or better than other options they can find, but then go beyond that and understand their environment, their job, their experience, and their pain. Shake up their expectations by providing them something they didn't know they needed or wanted. Ideally, you reset your customers' expectations to match your offering where ultimately they want you, rather than a widget that any of your competitors can offer."

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