Ron Burgess – Founder of four businesses and consultant to hundreds more.
To start a new business today, look at where niche markets are being created.
To properly investigate this subject, one must look at the primary trends shaping our economy and niche markets now.
Market disruption is occurring across nearly all industries. This disruption, of course, is due to the digital revolution. The digital revolution is the nexus of incredible computer power, advanced software, and (Internet) connectivity. (The New Online Paradigm: Channel Disruption)
This disruption goes far beyond buying online. It is the backbone of how parts from around the world are made into a product, getting a product to the best fulfillment location, and finally mapping the last few miles to the home or business. This is happening in industrial distribution as well as consumer goods.
Digital also now helps run the machines that make products and will probably drive the trucks that will transport what the machines make.
Digital, which creates the numbers for engineering, also drives the visual interpretation of the product design and selling tools. Existing technology, which will become much more widely used, includes three-dimensional viewing of products and specifications, live video demonstrations and collaboration, and custom manufacturing for the purchasers.
This article is not about technology, but starting any business for the future must include the levels and understanding of how digital will be used to create and fill new cracks in the market niche. Recognizing and exploiting developing cracks in the market is what entrepreneurs have always done. It is the digital aspects that will now influence the niche, and where value will be created for the customer.
We don’t have to elaborate on the Amazon phenomena now because all readers understand how the online monster is changing the way we shop. What we do want to do is consider how this big trend will continue and where the market cracks will exist in the retail business. By “retail” we mean the last company that held the product or service before the end user bought it.
Amazon is a retailer (as well as distributor). They currently do not own manufacturing plants, but they could easily own them if they see any competitive advantage. But manufacturing today is really a job shop, a company specializing in making stuff, but not necessarily selling it to the end user. Today the brand still has power, but few brands make their own products. Nike was the company that first became a big brand and owned no factories. I first bought Nike from Phil Night (a founder of Nike) from a card table in the L.A. Merchandise Mart in the mid-1970s. He had two shoes made in Korea. He asked me if I thought they were “clean,” meaning they were production goods not specially built samples. He carefully explained that they were made in Korea. This was a time when Asian footwear was highly inferior. The selling point was that they were designed by athletes, and they were about 15 percent cheaper so the retailer could get a better markup.
The rest is history, but the enduring legacy is that contract manufacturing could be very effective from low-cost countries if the lead time was long enough for the product to be shipped. Lead times are now shorter; air freight is now economical for many kinds of products.
This concept was widely exposed by Thomas Friedman in his best-selling book, The World Is Flat, in 2005. He illustrates how the world’s factories are modular: They make the same things, mostly the same way, so the lowest cost gets the business. With cheaper shipping costs and faster communications, production can easily be moved from one place to another. This frees manufactured goods from a physical location. This principle changed the old paradigms of the manufacturer in the 1980s. Much has advanced since then.
Now manufacturing is changing again. With digital control of machinery, factories are even more modular (becoming commodities). Where it was driven by low labor costs against the cost of shipping, now it may be changing again. 3-D printing allows the product design to be transmitted via the web to a machine that will “sculpt” a part from plastic, metal, or even porcelain. This is happening now, but long-run productions are not cost-effective — yet. But when just a few units are required and the cost works in the market niche, 3-D printers can be anywhere the Internet is and build most products. This will change the entire dynamic of geography versus labor versus market. How many opportunities are there for antique auto parts, artworks, a critical cog in an expensive machine, or broken parts on ocean-going oil tankers? How many times must you wait for a part for a broken appliance? Appliances are more complex than ever, and parts are not always available to your repairman, but the part could be 3-D printed and delivered to the repairman in hours.
Re-thinking digital means rethinking the economy—and niche markets.
We have a huge economy with millions of small market cracks. I estimate that over 90 percent have or will be at least moderately impacted by the digital disruption. Where should the new business look for places to exist in the cracks left by the new giants fighting over the big market niches?
One way to find them is to consider current markets where the cost is too high now. Solutions to high prices and big margins of middlemen have already been seen in companies like UBER and AirB&B. Cab companies have become bloated by the high cost of medallions (licensing) and inefficient matching of customers and drivers. Software and smart phones solved this problem. In my little town one could barely figure out where a cab was, but Uber has dozens of drivers ready to pick me up using my cell phone app.
AirB&B has done the same by connecting real estate owners directly with renters. Cutting out the highly inefficient brokers means the property owner gets larger fees and can charge less than others. In each case it was the distribution system that changed. Cars and drivers are still used; they just connect directly with the customer. Apartments and houses are still rented; they just more easily connect with the renter. In both cases the digital difference is the channel used by the customer to access the service.
Most products and services will not change; they will be accessed differently by the customer or made and delivered to the customer more efficiently. In both cases digital processes are the key component.
The same transportation/marketing interface concept will be used for many more niches. The same kind of technology is already rolled out by InstaCart and other grocery deliveries. InstaCart matches the shopper/driver with the customer order. They communicate on out-of-stocks, changes et cetera, and then deliver it in a one-hour window. The shopper/drivers work when they want to and may also be Uber drivers to fill in their workday. The employee is empowered to work when they want. They see when it is busy and know they will make more. They intuitively adjust their schedules to demand and how much they can make; it is a perfect economic model reacting directly to supply and demand with no friction. Even dog-walking companies are using these apps. Your can sign up at work and track the path the walker takes your dog. I’m not sure employers will love spending time watching your dog’s walking path, though.
Any company selling products that can be delivered must understand how this change both in technology and the relationship between shopper/driver and what used to be an employer will change the business climate. All physical products that can be made and delivered for less with better service is impacted.
Education
But its not only products. Perhaps the biggest problem facing the U.S. and other countries is the cost of education. For many former students, it is literally choking off opportunity due to high debt. The margins in delivering education are much higher than almost any physical product. Even in today’s world the cost of “teaching” is a fraction of the cost for overhead and administration. Universities with expensive sports arenas, climbing walls in the student recreation facilities, and lots of “research” professors, have excess overhead that digital can change. If a teacher has just 4 classes but is paid $75,000 (not bad for half a day), then in very small classes of 20, each course would have teaching costs of just $234. Most bachelor’s degrees require about 30 classes for a total cost of just $7,000. Add some room and equipment cost and an administration overhead of as much as 20 percent (generous in my mind), then a traditional degree should cost about $10,000 for four years!
However, the actual price is more like $10,000 for each year, or $40,000 and much more in many colleges. In other words, the margin on the actual product is in the range of 400 percent. Retailers generally have an 85 percent actual markup; distributors, 30 percent; manufacturing, 30 to 100 percent; services, 300 percent. So education has one of best opportunities for new entries.
One such new entry is Oak Valley College in Southern California. By keeping costs realistic and renting classrooms, they are developing a degree in business for the four-year cost of just $15,000. The schedule is done year-round so is actually completed in just three years. Further, teachers are part-time (qualified but working in their fields), so they may teach one or two classes instead of four or five. This saves money while keeping the old stodgy profs who haven’t worked in the field in decades out of the classroom.
The above example is based on traditional teaching. What about digital teaching? Development costs will be much higher for each course, but the direct cost could drop dramatically. With video lectures, online class chat, and online testing (and grading) how much personal interaction will be absolutely required to ensure quality? Not nearly as much. So the opportunity is clear, lots of money is waiting to be made in education, unless the existing regulations continue to prohibit entry. Of course, this is a very regulated environment to get the “degree.”
While companies traditionally want better qualified employees, they still put stock in the “degree.” Other companies are questioning the need for a degree. Right now the gaps in employment are in the trades and skilled jobs, not college degrees. As the digital world takes many former “thinking” jobs such as accounting, customer services, salespeople, order processing, and other right-brain jobs, the need for a real skill goes up as the need for the degree goes down.
Further, interactive classes where a student can listen to lectures from the best experts, interface with students, and do lab work in digital labs can be developed by the best in each area. Digital benchmarking will determine which of the classes is most effective, taking the mediocre teachers out of the mix, at a cost just a small fraction of real teachers.
Businesses are fine with degrees, but only if they come with the skill they need. A manager of software developers must also know how to write software. Business only graduates may make fine managers in some fields but more and more they must also have come from a real skilled position whether it is from a university or trade school.
Artificial Intelligence
Artificial Intelligence is part of software but another level beyond what we have been used to. With speech recognition added to home devices like Alexa and Siri, we have already started the new culture around machine intelligence. The digital Alexa can reorder your favorite toilet paper, via the company you choose, and it will be delivered the following day with your normal order. This technology already has impacted the customer service industry with interactive phone speech recognition. While many have had bad experiences so far, it’s because they have been working on the 20 percent of questions that make up 80percent of the calls. Yours was probably outside the 80/20 principle, but the others will eventually be addressed.
Many more applications will include AI as an additional layer of software, sitting on servers worldwide. The number of people required to do customer service will likely drop except in low-wage countries. Gil Press writing in Forbes magazine, identifies ten AI technologies.[1] We recognize a few, such as Natural Language Generation, Speech Recognition, and Virtual Agents. But others are not: Deep Learning Platforms, Robotic Process Automation. Tiny pieces touch our lives now, but these technologies will be added to systems and devices in ways that are amazing but not necessarily recognized.
Thousands of new niche markets are being created by just these ten technologies now.
Millions will simply make smaller shifts into digital to find their own new cracks in the market.
But how does the small one-person business startup access these tools? I suppose robots to do the work is one way, but It’s mostly based on focusing on the customer and finding competitive solutions to less efficient delivery. Plumbers, appliance repair, garage door installers, machinery repair shops, and any company that responds to a call for service today, can use better systems to delivering service.
If a customer connects with your schedule, they can pick a time that will work for them. Better data on length of repair and likely problems will allow better time usage for an automated schedule. Why can’t your plumbers sign up for work when they want, and allow them to work in the morning and evening so they can meet their kids for sports in the afternoon? What resident wouldn’t like to have service later in the day, so they don’t have to take time off work? Yet do any plumbers in America do this? Not in my area. New mobile phone apps can open your house when you see him at the door with a remote camera. Low-cost cameras provide security; that’s why they are working.
New diagnostic software will help you know when an appliance needs work and could order the repair itself if you pick a vendor. Monitored HVAC systems, equipment, can do the same in industrial settings.
New innovations are possible for those willing to find customer facing benefits. How many times do your customers not buy online because the photo is poor or details and specifications are poor. My experience online is that only one in ten products have all the required information for parts, home repair items, and equipment.
One new business niche is competing with Amazon. Lots of third-party companies can do some of what Amazon does. One company called Stord, started by two twenty-year-olds, has developed software that looks for open warehouse space and matches it to goods needing distribution. A company may have two or three warehouses in the U.S. but needs to be closer to the end user for quick delivery. Stord can set up a warehouse in 24 hours and set an order on the road the next morning if ordered before 2:00 p.m. The cost is $20.00 per pallet. Stord may not be selling goods, but if your company can sell and needs faster delivery to compete with Amazon, here is one solution. Many will simply choose not to deal with Amazon because they can be cannibalistic with their own customers if they think they can make more money.[2]
Many are already engaged in these new technologies. In January the CES (Consumer Electronics Show) in Las Vegas had over 4,000 company booths; 800 were start-ups.[3]
Customers will have higher and higher expectations based on the small exposure to new digital services. Those businesses that find new ways to deliver products and services will outperform those who choose to pretend that the Internet or mobile phone doesn’t have anything to do with their business. I imagine every cab driver in New York thought the same thing, just as many retailers thought online buying would not happen. Hello Sears. Well, good-bye, Sears.
[1] Gil Press, Forbes magazine, “Top 10 Hot Artificial Intelligence (AI) Technologies,” https://www.forbes.com/sites/gilpress/2017/01/23/top-10-hot-artificial-intelligence-ai-technologies/#5b8b33d91928
[2] Forbes magazine, “A Startup, Stord, is Building an On Demand Warehouse Business,” https://www.forbes.com/sites/forbestreptalks/2018/01/02/a-startup-stord-is-building-an-on-demand-warehouse-service-for-companies-competing-with-amazon/#51292a5d2f5b
[3] New York Times, “CES 2018: What the Gadget Fest Looks Like in ‘the Year of A.I.’,” Whitney Richardson and Brian X. Chen,https://www.nytimes.com/2018/01/11/business/ces-gadgets-technology.html
