In Demand and On Demand - 3

Now that you’ve considered several areas of research and narrowed down your list, you’ve tentatively made a decision on the niche market that will be most successful for you as a whole.

However, there are a few more things involved in making the final choice of a niche in the industry. You must consider the law of supply and demand – is your product or service going to hold strong in the market based on the trend in demand? And what is the outlook for the profit margin you can expect in the future?

These are the determining factors in finalizing your choice for a niche market.

WHY DOES IT MATTER?

It may seem obvious to some that a particular product or service is in high demand or is a hot commodity. However, many don’t understand why this is important to their business. After all, if you have a product or service that is worthy of purchase, shouldn’t people want to pay for it anyway?

In an ideal world, your niche market would be such a novel idea that anyone noticing your idea would assume that your product or service would better their lives. In other words, you would create the demand for your business yourself. However, this is not the law of supply and demand, so you must see this function more objectively.

DEMAND FUELS YOUR PROFIT

If you observe the various marketplaces in different industries, you’ll find plenty of evidence that the demand for a product causes prices to increase. While some may argue that the increased cost of excess production to meet demand fuels the need to raise the price, the reality is that higher demand allows companies to charge more for their goods and services, meaning they rake in a higher profit margin.

However, the ability to raise prices doesn’t continue forever, and in some instances, it may not even take place. Let’s look more closely at the law of supply and demand, and you’ll see when this drive for a particular product can cause a turnaround in this trend.

The Law of Supply and Demand

The basic rule of supply and demand is that, when something is supplied plentifully and not in as great of demand, the price consumers are willing to pay is reduced. Likewise, if something is in short supply and high demand, the price that can be charged to consumers rises.

In the winter, the cost of gloves and coats increases in the stores because they are in high demand. At the same time, the cost of shorts and bathing suits is reduced drastically.

When a company sees that its niche market is in desperate need of more products or services, this fuels their production level. Most companies will kick into high gear to produce a greater supply while the demand is high and they can gain the greatest profits.

Others will try to enter that niche market to cash in on the trend. Beware of this practice. If you should jump into a “trendy” niche, you’ll find that, as you and others begin providing the goods and services that are in demand, the supply will start to outnumber the demand, and profit margins will disappear.

You must find a balance in your niche market. While you want to enter into a business that is in high demand, you want to start something that will continue to be in demand rather than cashing in on a wave.

Offering What’s in Demand

Choosing your niche market is a lot like fashion. Many people follow current trends and purchase a closet full of clothes to fit in with the crowd. After a few months, the trend is over, and these people have a closet full of clothes they can’t wear, as well as a need to purchase new items to match the latest trend.

Others are more concerned with having clothes that will always fit in and, while purchasing a few trendy items here and there, base their wardrobe on classic items that never go out of style. That way, their basics are always available, and they don’t find themselves running out of money or supply of proper clothing.

The same consideration should be taken with your Internet business. While your niche should be something that is unique, and you should certainly find a market that is profitable for you, keep in mind that you don’t want to offer something that is going to go “out of style” in short order. You want that “classic” that is always going to be in demand so that you can continue to profit in the future.

DETERMINE THE POTENTIAL PROFIT MARGIN IN YOUR NICHE MARKET

Let’s return to our pet business example from earlier. You’ve determined that you are going to sell vitamins for animals to promote health and long lives in pets. You’ll have a line for cats and another for dogs.

How can you determine what the potential profit margin for such a niche market is to verify that you’ve made an intelligent decision? Consider two key factors: how many other sources are available for such a product, and how much is YOUR cost for operation?

How Many Sources Are Available?

Obviously, some businesses do just fine with healthy competition. If you look around your neighborhood, you’ll find several different convenience stores operating with little worry that one will shut another down. Department stores carry many of the same types of items and don’t seem to push each other out of business, either

However, in a small niche market, having three or four competitors can fuel hefty competition and make profiting difficult. Because you are offering your vitamins on your website, you will want to carefully perform Internet searches to determine how many other sources are offering the same or similar products. So that you are perfectly aware of the number of competitors, as well as what sort of pricing they are offering. After all, even if there is only one other source for dog vitamins, they could easily offer the product for a lower price and put you out of business.

What is Your Overhead?

One major mistake that you can make in predicting the profitability of your niche market is to forget about your overhead costs. No business is free to run, and even an Internet startup business can incur great costs.

If you forget this important factor or underestimate your business expenses, you’ll be counting on unrealistic profit margins, and your business plan will fall apart.

Remember that business expenses include more than just the wholesale cost of the product you sell or the supplies you use. You must also count yourself as an employee and count the time and effort you place into the business as an expense. If you are not holding a full time job and are simply running your Internet business, this is your sole source of income, and you must treat it as such.

The key to success is knowing that your operating expenses can be covered by what you charge for an item or service while still maintaining a reasonable, competitive rate.