Building a Profitable Niche

I don’t do endorsements — that’s for ball players. For me to endorse a product would be the end of my credibility. All I look for is what works and, if it does, I’ll point it out. If something doesn’t live up to the hype, I follow my mother’s advice and say nothing. That’s why I was surprised when someone brought to my attention a borderline situation in which a vendor did its best to imply my endorsement against its rival, Salesforce.com.

Now, Salesforce.com is not a perfect company, and now and then I point that out publicly — but I also advise them from time to time, and I want that made clear too. What follows is my musing on the whole episode and why one company, like Salesforce.com, becomes enormously successful while others eat dust. This is not a definitive study, just my observation.

Nesting Technique

It seems like a lot of companies in the CRM space are now trying to use what they see as Salesforce.com’s tactics to get a leg up in the market — but, predictably, they are getting it wrong, and this is important. There are more than a few companies that claim to do everything that Salesforce.com does but at a lower price point or with greater reliability or some other “differentiator.” I call this the classic takeaway, because the competitor is simply trying to slip into a market niche established by its rival.

In the animal world, there is a species of bird — I think it’s the cuckoo — that sometimes lays its eggs in other birds’ nests. The duped bird hatches the cuckoo’s egg and raises it as if it were its own. Perhaps the word “cuckold” has roots in this piece of avian legerdemain. It’s a nice trick if you can get away with it, and that’s what so many vendors try to do — lay their marketing eggs in a nest already built by someone else. In markets, it rarely works.

Some of you will say that’s what Salesforce.com did with Siebel, and turnabout is fair play — but on closer examination, that’s not what I think they did. Siebel became the biggest CRM vendor — with US$2 billion in annual revenues for a while — on the strength of its client-server based solution. Think of that as the nest. Salesforce.com did not try to lay its eggs in that nest.

In fact, Salesforce.com did everything it could to trash the existing nest and build a better one right next door. Salesforce.com turned Siebel’s primary strength into a liability — effectively making Siebel unattractive for a growing part of the CRM market.

New vs. Better

To succeed, Salesforce.com had to risk being different. Its didn’t claim it was 10 percent better than Siebel; it invented its own niche and delivery model, and sold that as a 100 percent superior solution — and that’s my rather simple point. That’s why endorsements don’t mean much when they are used in a classic takeaway strategy, but they are worth a boatload when a thought leader identifies something new and tells the world about it.

Just in case you might think this is all over, you should think again. Eventually, the horde of competitors will wear down even the best new niche and the “We’re cheaper” and “We’re more reliable” messages will have their effect. When the barbarians finally break through, though, there won’t be much left behind the wall. They will find they have been actors in a creative destruction play.

Smart companies don’t wait for the inevitable, because they are always looking for new niches to build. You can see that happening right now. Although Salesforce.com makes virtually all of its revenue from CRM, the company is thinking ahead to the next wave in its evolution with its platform strategy. Other vendors are working away at platforms too, and Salesforce.com will not be alone. However, as it did with on-demand computing, it will have the pole position based on its first move into the space.

The Way to Succeed

I have written a lot about the disruptive innovation part of this tactic, and thinking about disruption is another important way to arrive at the same point. It is the companies that change the rules and find a new way to do something by way of a process, product or model that have the best chance of succeeding.

As for the others — the ones that scream, “We’re just as good, but cheaper!” — they never get it. Maybe one or two of them will survive for a while in a shrinking niche, but eventually they will become irrelevant. Geoffrey Moore and Clayton Christensen each in their own ways wrote books that explored these inevitabilities, and it amazes me how well their theories predict movements.

I am just the guy that gets to watch everything unfold. Some job, eh?