Niche Marketing Equals Disruptive Innovation and Sustainable Profits for Small Businesses.
The current debate between Chris Anderson of Wired.com and Malcolm Gladwell in the New Yorker has sparked a discussion on pricing that is critical for all small business owners and entrepreneurs to understand.
Chris Anderson states that information wants to be free, and as such, companies providing digital information should accept that and develop their profits around the information, not in the information. Referencing the music industry, Anderson say’s “They should stop complaining, and capitalize on the added exposure that piracy provides by making money through touring, merchandise sales, and “yes, the sale of some of [their] music to people who still want CDs or prefer to buy their music online.”
Malcolm Gladwell balks at the music industry example and uses YouTube to show that giving away digital products is not a sustainable profit model with Google expected to lose several hundred million this year from YouTube.
My view? Malcolm Gladwell, whom I like and respect, is taking a valid and legitimate concept offered by Chris and making that the sole subject of discussion, which distorts the real issue. There are industries, not all of course, that are toward the end of their life cycle as they once knew it, that must re-evaluate how they do business. Where their products pertain to digital media and print, the model is undergoing a significant adjustment and businesses must react appropriately and not fight a battle they won’t win.
The bottom line, as Seth Godin correctly points out, is that ‘Free’ is a way for marketers to garner attention from their customers by offering free content and products that have low real development costs. In the music industry, performers use the attention to profit from touring, etc.
All business owners and entrepreneurs must understand this key point.
- The market decides what business models we as small businesses and entrepreneurs profit from.
We may implement a model we believe is best, but the market tells us by our success or lack thereof, which it prefers. If we adjust our model in time, we are successful and we make money. If we believe our way is best and refuse to change, then we will fail, whether immediately or soon after. What we want or what we believe is right, doesn’t matter. If we don’t listen to the market then we deserve to fail, hard, fast, and painful. The market will do what it wants, not as some intelligent being directing it, but as a natural consequence to consumer preference and buying behavior. In other words, how consumers buy, what they will buy, and how much they will pay, evolves and we must adjust accordingly.
If you market commodity-based products, be they digital or tangible, the market is telling you that your pricing will come down if not go to free. There are exceptions of course. In general, the easier a consumer can access your information / product, the less leverage and opportunity you have to collect money for that product.
If you are an enlightened marketer of niche products, I have great news for you. The market is telling you loud and clear that niche marketing is your way to make money. If you have products appropriate to using the ‘free’ model to garner attention around your profit centers, that is fantastic. If you don’t, that’s okay. Niche products command price maximums and allow you to have higher margins, much higher margins, in the beginning of your niche life cycle. Of course as your niche segment matures, your margins will come down via the market and you will then enter the pricing model being argued by Chris Anderson and Malcolm Gladwell.
The lesson? Develop and market niche products and capture the maximum pricing lifecycle for as long as the market will allow. Even better, use your products that have run their cycle to increase the PR around your niche products to establish yourself even deeper with your customers and extend the time you can capture profits. This hybrid model will increase the effectiveness and profitability of your small business in the market.