Niche brands are in a better strategic position for profits and growth.
Someone asked me recently: why entrepreneurs and investors were so quick to make meaningless brand with broad appeal? I thought, ‘duh, to make money!’ But then I tought about it some more, and it was a really good question. I know broad brands make a lot of revenue, but niche brands are where all the profit is.
A niche brand is one that is very meaningful to some people, but not applicable to most people. Niche brands seek to create deep relationships with a subset of potential customers, and ignore the rest. Niche brands include: Ferarri, Arc’teryx, Lorna Jane, DJI, Cabelas, Jeep, and 4Chan.
Broad brands have high brand recognition but aren’t particularly well-liked, as we see in mass retailers, insurance companies, banks, etc. Broad brands include Chevrolet, HP, Walmart, Kraft, Levis, Gap, and Sony.
Deep brands are lesser known of but well loved because they acknowledge a small group and / or solve a niche problem. “Deep brand” and “niche brand” can be used interchangeably. Niche brands have more motivated customers, and thus have more effective advertising and can charge a premium. Niche brands grow up from this passionate base.
A niche brand can easily grow by adding people who haven’t heard of the brand to their passionate base. Broad brands struggle to increase profits because they have to make their existing customers more profitable. A niche brand can also be more profitable in the short run because their passionate customers are profitable, and they do not have the “leech” customers that broad brand has.
Would you rather be Dave or Serge?
On Main Street of a cute suburb, there are two retailers with two very different founders. Dave runs a well-known discount family restaurant and Serge a well-loved bicycle shop that sells new and performs repairs.
Dave’s family restaurant is well attended, and often reaches capacity on Friday and Saturday evenings. They are known far and wide for their $5.99 eggs, bacon and toast plate. They have a long menu full of Americana foods. The restaurant’s annual revenue is four times what the bike shop does in the same year.
Serge’s bike shop is an oddity in the “old town” of the suburb; the bike shop doesn’t take advantage of the healthy walk in traffic the other businesses enjoy. Instead, Serge’s customers travel far and wide for his import bikes and top-off-class services. They are considered “cool” and have converted hundreds of teenagers from skateboarding to BMX.
I would rather invest in Serge, the owner of the bike shop. I know he could make a much larger business out of it. But it has much less customer volume and brand recognition, so why? Wouldn’t the restaurant make more money with the investment?
We confuse breadth with depth.
We often write off niche brand owners like Serge because we often confuse breadth with depth when considering brands. Broad brands are ones that are well known but not particularly well liked; think of Walmart, State Farm, or Wendy’s. The companies that own these brands have some of the highest revenue numbers in the world but are at single digit profit margins assuming they stay out of the red.
Deep brands are ones that may appeal only to a much narrower set of people, but they create a lot of value to those people. These brands have lower revenue but are highly profitable. These brands are often called niche brands, and we are going to use the terms “niche brand” and “deep brand” interchangeably.
Of course, some brands have both breadth and depth. Apple was a niche computer company for years, but now they sell almost half of the smartphones but take 91% of the profits of the industry. We recently featured Beats by Dre, who went from nothing to 64% of the $100+ headphone market in only a few years by inspiring a whole new set of people to throw out their bundled earbuds and listen to music with the quality it was recorded to have. And Starbucks now has 28,218 locations without compromising on the price of their lattes.
Notice that all of those brands started as niches and exploded in popularity because of societal trends. When was the last time a well-known but poorly liked brand become one of the most profitable companies in the world? It just doesn’t happen. Every week, I read CEOs public “turn around” plans for big brands in decline, and rarely read about the success of these plans. Changing public perception from negative to positive is like pushing a boulder up hill.
Solve a niche problem, gain a customer for life.
Niche brands motivate people. Firstly, people are appreciated that they are acknowledged by a brand for their uniqueness. Secondly, people are very grateful that someone has solved their niche problem. Thirdly, they appreciate community of like minded people the brand attracts.
Niche customers happily pay a premium price point, recommend a friend, or share content. Advertising is more effective for niche brands because the ads can be more targeted and people take more notice of the ads. Deep brands have customers that opt into regular communication channels like newsletters, Twitter, Facebook, etc. Customer loyalty for deep brands is in a different league than brands with more of a broad appeal. Everything these businesses do in the brand to customer channel is more effective and less expensive (see our article on stakeholder relationships and value channels if you want to know more).
Deep brands often have a message that inspires, while broad brands resort to manipulations. “Manipulations (dropping your price, having a promotion, using a scare tactic) can be very effective, but the gains are usually short term,” says Simon Sinek in his blog named “Start with Why” after his book. “Over time, manipulations tend to get expensive – marketers must keep coming up with bigger and better manipulations sometimes at the expense of profits and always at the sacrifice of developing loyal relationships with customers”
Deep brands grow out from a passionate base.
Niche brands broaden out from a passionate base of people. This is far easier than trying to make a broad set of people care about the brand. It is far easier to make positive first impressions than change peoples minds.
Niche brands have a disproportionate amount of promoters as customers. The people that love a brand will evangelize and promote it just to be a part. A broad but unloved brand’s base will not promote the company because there isn’t that desire to be part of a movement; this is why you see people wearing DC Shoes shirts but never see anyone wearing Walmart shirts. A brand with broad appeal will also have more detractors; these are individuals who had a bad experience or just disagree with the brand’s point of view. It is probably easier to find someone with unkind words about Walmart then DC Shoes.
A thought experiment using modified NPS.
Let’s illustrate this by performing a theoretical pole using the standard Net Promoter Score question, but we will sample people on the street (instead of customers as typical with NPS) and give them an option to say they have never heard of the brand. The participants of our thought experiment will be a) a well-known but not particularly well-loved brand, and b) a lifestyle brand.
We know from our lifestyle brand series that lifestyle brand is a niche brand where the people who love the lifestyle love the brand, and the people who aren’t part of the lifestyle don’t know about it or care one way or the other. The lifestyle brand will thus only have a brand recognition of 40%, but those people will be a narrow bell curve with an average of 8.5.
Everyone and their mother have an opinion on a large brand like Walmart or State Farm, and it is favorable overall (they wouldn’t be in business if it wasn’t) but not particularly well liked. We will represent the broad brand as having 90% brand recognition and a wide bell curve with the mean at 6 on the scale.
If you do not believe any of these assumptions are close to reality and this thought experiment is valid, please let me know if the comments or through email. I am open to scrutiny, especially when I receive emails from the members of the BMB Premier List.
You may look at these graphs and would rather your business have the broad base, but the niche brand is in a better strategic position.
The broad brand could try to make customers out of the remaining 10% of people, but this is increasingly more expensive. The only other way to grow the brand is to try to push the mean of the bell curve over by making the customers you do have change their opinion to be more favorable. Have you sought to change someone’s mind? It is going to be an uphill battle for the board brand.
The niche brand, on the other hand, has a much easier time growing the brand. Their customers are promoters, so they will bring their friends, family and colleagues into the brand and place them around them in the bell curve. We will grant that niche brands are by definition not appealing to everyone, so the brand will grow up and to the left, meaning that the people brought in will not have as high opinion of the brand as the base.
Strategically, this is a much better position. The lifestyle brand is poised for future growth while the broad brand struggles to make more money tomorrow than they did today.
But that is the future. Isn’t the broad brand raking in cash today?
Niche brands are profitable today.
Let’s add in some customer profitability value values here assuming that the detractors cost the brand money and that people who are on the extreme positive end will be highly profitable. So the people on the bottom of the scale are not profitable to the brand; they are detractors to friends and family, only shop the sales, they tie up the customer service line, etc. The people in the direct middle are neither profitable or money losers. The people on the high end of the scale love the product or service and will pay a premium for it. A pretty safe assumption, as we have seen the patrons of Arc’teryx will pay fifteen times more than a winter jacket from a mass merchant in our case study.
If we multiply the customer profitability scale to our prior distributions and it becomes even more apparent the better position the niche brand finds itself.
The niche brand rockets ahead of the broad brand when we multiply the distribution with customer profitability. The market-dominating broad brand with its 90% brand recognition has an overall profit of $85. But, with only 40% brand recognition, the niche brand has a profit of $122!
I don’t need to tell the entrepreneurs and business owners who read this blog that a company can grow much quicker when it is 44% more profitable. A company in growth mode can invest that all back into customer acquisition.
A criticism I head of Beats by Dre when I was researching their case study was that more of the money from the purchase price goes to marketing rather than premium components when compared to other headphones from brands like Audio Technica.
There are two problems with this argument. Firstly, you can get premium products for cheap when you buy 10X more than every other company. And secondly, they have the causality arrow in the wrong direction. It’s not that they can advertise and make people love it because it is highly profitable. More accurately put: people love it, therefore, it is highly profitable which affords them the money to advertise.
Conclusion: take a second look at deep brands.
Strategy is putting your company in the best position for future profits. Having broad recognition and a large addressable market may seem like the bet way to achieve that. But unfortunately, a company with a broad brand trying to grow profits hits two brick walls.
The first brick wall is that peoples minds are already set, and hard to change. A company can change people’s minds, but it will be far more of an investment than if they had a chance to make a first impression. This is why there is such thing as a “re-brand” where a big business will change their name and look because their brand is more of a liability than an asset.
The second brick wall is that a broad brand is inherently unprofitable. If people don’t love a brand or you are not delivering tremendous value (these generally go hand in hand) than you are not going to be able to charge a premium for your product. No premium price means that you are not generating extra cash to invest in customer acquisition and there is no argument to be made to outside investors.
A niche brand appears less likely to reap big profits in the future because they can only sell to a subset of customers by definition. But they are more apt to grow profits in the future because they have a base to build from and they have profits to invest into customer acquisition.
Niche also have the potential to become one of the great profitable companies of history, like Apple, Starbucks or Beats, if their niche rides a wave of popularity and becomes mainstream. The only caveat to the niche brand strategy is that it will take societal trends to bring a niche to the mainstream, and this is largely out of the companies control.