3. 3. 1  Niche and mass markets

For any company with strong economies of scale, as is true of software product companies, the bigger the user base, the higher the profit margin. Therefore, the seemingly more lucrative option would be to aim its products at mass markets.

However, a strategy like this can be fraught with difficulties: the mass market will be more closely analysed, controlled and saturated by the big corporations. For a company that is just starting out, it will be extremely difficult to compete with companies that are already established and dominant in the sector, and which will also have a large capacity for marketing and diffusion.

It will be easier to meet the needs detected in niche markets, which are unattractive to large companies due to their size. For large companies, the potential returns from these markets are too low given the small number of customers, but they will be more than sufficient for a small business. The number of potential niches is vast and there are numerous factors on whose basis we can segment and identify a market. The key question here will be how many potential consumers will this niche provide, as this will allow us to calculate the volume of business and hence, the volume of expenses that the company can afford.

Software offers more interesting possibilities than other tangible products in niche markets because of the absence of geographical barriers with the Internet. A niche detected in a given geographical area may be relatively easily extrapolated to other areas with similar needs or even be extended by itself, without the need for special efforts from the marketing company.

When we create products for niche markets, it is essential to know this particular environment very thoroughly. Besides technical skills, we need to have an excellent knowledge of the activities, priorities and modus operandi of the niche in question. Following Eric Raymond's rule, "Every good work of software starts by scratching a developer's personal itch", it is useful to start with a niche that we form part of, in order to better understand what needs and problems lie within it.

Knowledge of the environment

This is the case of the software developers' niche: it is a well-covered and exploited ground, since every programmer is both a creator and user with an intimate knowledge of the needs and problems of the sector.

Another important factor to consider is whether the product is going to be sold to corporate environments, small businesses or individuals.

Service companies should focus on corporate environments, governments and other organisations because private consumers rarely pay for software-based services. Product companies, however, may choose the prospective clients of the target market based on the features of their products and their business strategy. Corporate customers may be more attractive because they are more willing to pay for a software product and will also contribute to the generation of revenue through services.

In the corporate environment, companies will pay for a software product, but they will also pay for support, training, installation and integration of the product into their existing systems. Companies that purchase software generally pay 15% to 25% of the price of the licence in annual maintenance fees (Dan Woods, Gautam Guliani, "Open source for the enterprise"). They also often seek custom developments to tailor the product to their specific needs. Thus, corporate customers will help software companies to generate revenue from services, giving them more guarantees of continuity. However, these new revenues will be more labour-intensive and the company will require careful management to ensure that the costs of providing the service do not exceed the income generated through it.

Recommended reading

D. Woods; G. Guliani (2005). Open source for the enterprise: managing risks, reaping rewards. O'Reilly Media, Inc.

Moreover, support services are often offered for specific product versions, so maintaining services relationship can also help with the generation of revenue in the form of licences for successive versions: although clients have no interest in purchasing the new version, they will be obliged to do so because support for the older version is no longer provided.

The downside is that major corporate clients will be reluctant to hire the services of a small, new company. One of the key factors in hiring is the reputation and trust generated by the company providing the services, so smaller firms or those that have just started up will find it easier to obtain clients of a similar profile, i.e. small and medium-sized companies.