Innovation, yes, but wrong turn

What does that mean, “be a niche product”? It’s not like it’s a bad thing. Just take a look at another niche product: Adobe Photoshop. It’s a rather expensive product. It’s designed for specialists who require the whole set of features it has. Regular, mainstream users don’t really need to use Photoshop, there are tons of cheaper and simpler alternatives. Nevertheless, this never stopped Adobe from making millions. In fact, you can take a look at all the specialised applications out there, designed with niche markets in mind, and see how immensely successful they usually are. Think about Autodesk (AutoCAD, Maya, 3DS); or about software for DJs, for movie producers, and so forth. All these have “hundreds of thousands” of users — sometimes “a few millions” — and never complain because they’re not “mainstream” products like, say, Microsoft Office.

There is this huge fallacy that every product or application launched has to be mainstream or be doomed to failure. This is hardly the case for tons of products out there. Even, in a sense, some “mainstream” products can be targeted to niche markets as well. Think about luxury cars, for example. Or Apple, the world’s most valuable company. You can even think of extreme examples like companies manufacturing satellites, or components for oil platforms. None of these are mainstream products but highly specialised applications for a relatively small market. And many are among the most successful companies in the world; they don’t need to be Proctor & Gamble with their mainstream products to be rich!

What is so different about companies specialising in niche markets? Well, first of all, they are in constant touch with their customers. Since they recognise from the start that their clients have special needs — because they’re in a very small market! — they need to know exactly what they want and deliver that — not more and not less. Unlike mainstream products, which have to deliver one-size-fits-all products which make the most amount of people happy, niche products need just to address specific market needs, but do them very well. Good examples are how niche markets become “brand cults”; examples are Harley Davidson or BMW, and most certainly Apple as well, but there are thousands more. Outsiders — “mainstreamers” — cannot even understand the appeal of the product or why it is so successful among the community of its users. More to the point, they might not even understand why a BMW fan will pay premium for a BMW bike, when a common Yamaha or Honda also has two wheels and a motor 🙂

Niche markets saturate quickly; they expand, if at all, very very slowly. That’s just because the number of people willing to be consumers in that market is always small. Sometimes, it’s just because they require special skills — Photoshop, for example, appeals to graphical designers, but it requires a lot of talent and skill to put Photoshop to good use. If you don’t have either, but still need to do some photo editing, you don’t need anything as complex as Photoshop. Similarly, if you’re not an architect but want to jot together the plan of your future home to discuss with an estate agent, you don’t need to learn how to use AutoCAD; SketchUp will do the job much easier — and much cheaper too. The number of people that actually need to use the product is not big, and, more to the point, doesn’t grow that much. Eventually there might be some sudden growth because of some sudden, unexpected, market change. Take a look at Photoshop again. It existed well before the Web was popular. But suddenly the Web was “invented”, and graphical designers now needed a tool that also allowed them to create Web designs. Photoshop was a natural choice for them — it was something they were already familiar with. So Adobe launched new functionality to make Photoshop more appealing to graphical designers who also did Web pages. But by chance they also got a completely new market, of aspiring web designers, which didn’t exist before, and started shopping for tools to help them do their job better and faster. Similar “sudden growth scenarios” happen often, when there is a market change, and a company suddenly retools their product to address that quickly, and reaping the rewards until the market saturates again (I guess that web designers are not “mainstream users” but their number grows so quickly that the exponential growth hasn’t stopped yet…).

But usually that’s not how niche market companies exploit their market. What they do is upselling. In the software world, this used to mean licenses: release a new version with new features and get all your existing users to pay extra for a tool they already owned. The big software industry names addressing niche markets still use that model. Others are a bit more clever: they just launch more and more tools, that work with the original product but extend its functionality. This is a bit more honest — clients pay just for the features they need, not to constantly upgrade what they already have — but both models are frequent (just try to look at Adobe’s product line with its complexity of different packaging the same set of tools together in completely different ways to see what I mean!).

Upselling is always easier than getting new customers. To draw more new customers, you need a marketing strategy that reaches out, does advertising, finds where the potential consumers are, do market analysis, and so forth. It’s costly. It pays off if the market is big enough. But on small markets this might be pointless to do. Just ask your existing customer base what kind of tools they cannot live without and tag a price to them. Keep in touch with them — after all, you already have their addresses! — and invite them to participate in testing, discussing, and collaborating in new releases. Adobe was very clever with the Photoshop plugins — I’m not sure if they have been the first to develop that concept or not — and even cleverer by providing a marketplace for them as well.

This is also a side-effect that is common on niche markets: the companies tend to encourage their customers to participate in the niche economy as well. Everybody benefits! The company will be seen as “friendly” because they support their customers by helping them to sell their own work; and customers remain loyal because they know they can also make a bit of extra money if they continue to work closely with the community around the company. Just to give you a different example, take a look at Myriad Software. They’re a tiny French software house which has been around for a decade or so, and which has close ties with universities. They develop something very specific: a software to compose music, for professional and amateur composers. This is not something easy to use like, say, Apple’s GarageBand. But it’s something where you can orchestrate a symphonic piece in the traditional way, and play it on your computer. The number of composers world-wide is tiny, but still, there are quite a lot of software that accomplishes the same thing (Sibelius being probably the market leader). So to effectively compete, Myriad Software developed a community of composers, by encouraging them to contribute music and arranging some contests. Many participants are actually composing students which join the community and submit university assignments 🙂 The software is also extensible. New features are implemented thanks to a feature voting tool. Now these guys are not “industry giants”, and they know that they cannot compete with massive advertising on specialised magazines. So instead they focus on the community and keep closely in touch with them. And they try to help any community projects as much as they can: for instance, if you  decide to ask them to sponsor a composition contest, they will gladly give some free licenses, so long as they can post some articles about it and make an announcement on the forums and newsletters as sponsors — which in turn will spread the news to potential contestants.

Obviously there are many, many similar examples. BMW also holds meetings together with bikers and let them participate in some design projects. They sponsor community events and have a marketplace for used bikes and spare parts. At the same time, they also license the brand for inclusion in merchandising. And occasionally they sponsor community events and send a few representatives there — speakers, evangelists, even some managers. All are seasoned bikers as well, so that the community is comfortable in having the “suits” around.

I suppose you’re seeing a pattern here. By focusing on a niche market, perfectly understanding that the product will never reach the mainstream, a company can completely change their strategy to be fully committed to the existing community instead of “dreaming” about a potential mainstream market that doesn’t exist. That commitment has lots of aspects, but it means mostly listening to what existing users want and develop just that. It means enabling current customers to somehow make some money out of the community, and sponsor that endeavour. And, of course, it means releasing new tools, upgrades, kits, or whatever is appropriate for the kind of company, to upsell to the existing customer base. Sometimes they get lucky — like Adobe did, thanks to the Web — and the market can suddenly increase dramatically for a few months or years, and they can seize the opportunity. But most of the time the market remains at a small size and grows very slowly.

Adobe, AutoDesk, Apple, BMW — all are successful companies addressing niche markets, but so is the tiny, unheard-of Myriad Software. All follow some variations of that rule. Sometimes they are lucky, like Adobe was — and sometimes they have the touch of a genius like Apple with the iPhone, which pretty much turned an Apple product truly into a mainstream product.

Now let’s switch our focus back to Second Life and its relation with Linden Lab. They’re actually not too bad: Second Life is mostly a community tool (so, unlike other companies, LL doesn’t need to create a new tool just to get the community together) and it already has a built-in economy. Clients — residents — make money out of LL’s product, and, in return, buy products and services from LL. LL has more than one way of allowing that to happen: land resale, LindeX, and the SL Marketplace are some good examples. So we residents are not “merely customers” but we also become participants in the overall economy, of which Linden Lab gets a slice. In fact, LL gets the smaller slice (according to their own numbers, at least), because, except for the SL Marketplace, they don’t charge anything for a L$ transaction. They are also doing something for the community, and Rod’s recent announcements show that they are possibly going back to the “old days” where Lindens and willing residents worked closely together to create a better (virtual) world. This is an important step, but one that is shared by many mainstream companies as well.

CC BY 4.0 Innovation, yes, but wrong turn by Gwyneth Llewelyn is licensed under a Creative Commons Attribution 4.0 International License.

About Gwyneth Llewelyn

I'm just a virtual girl in a virtual world...

5 Pingbacks/Trackbacks

  • Kathy Waverider

    Wow that was put so much better than I could have written… I’ve always wondered why LL doesn’t appreciate their paying customers more… Looking at the bright side, apparently we have at last been upgraded from “scum that must be eliminated” to “ehh…”, so I guess there is hope.

  • Kathy Waverider

    Wow that was put so much better than I could have written… I’ve always wondered why LL doesn’t appreciate their paying customers more… Looking at the bright side, apparently we have at last been upgraded from “scum that must be eliminated” to “ehh…”, so I guess there is hope.

  • Kathy Waverider

    Wow that was put so much better than I could have written… I’ve always wondered why LL doesn’t appreciate their paying customers more… Looking at the bright side, apparently we have at last been upgraded from “scum that must be eliminated” to “ehh…”, so I guess there is hope.

  • My god!  If I were a straight guy, I’d declare to you my undying love.  For *years* I have been trying to figure out why certain other SL observers/bloggers/media-folks are obsessed with this idea that SL needs to be mainstreamed to even survive, much less thrive.  It’s trivial to point out successful players — sometimes very successful players — focused on niche markets, as you have done here.  I have no idea why this is so difficult to understand.

  • Bartholomew Gallacher

    I do disagree deeply. Linden Lab needs new users and the reason is simple to see: for most of the residents Second Life is nothing more but some kind of game, They discover it, live it, shape their avatar whatever and after a while they grow bored. Make that perhaps 1 to 1 1/2 years. That’s then the time when they are leaving Second Life for good, because they’ve outgrown it, such kind of fluctuation is normal, looking for new shores to discover, most never returning again.

    This means even if Linden Lab only wants to enable some kind of healthy status quo for over a long time, some kind of stagnation, that Second Life needs a certain amount of real new users on a regular base. Otherwise it would lead sooner or later first to stagnation and after that to a massive shrinkage of the whole platform..

    So while playing the niché game might be quite interesting, this is simply not enough, because the company also needs to focus on new users for its own good dearly. It’s how it works, nothing more, nothing less, the company needs a constant influx of new users for its own survival.

  • Aliasi Stonebender

    Pretty much what I’ve been saying all along m’self, gwyn.  There’s nothing wrong with being ‘niche’ – Photoshop is ‘niche’, yet it’s widely considered the only serious graphic manipulation program out there. Sure, you have opensource diehards who use the GIMP and people who don’t have money and don’t wish to pirate who use Paint Shop Pro, but the industry? Photoshop. It brings in goodly money, I am sure.

    Make Second Life the industry standard for creative collaboration, play up the “Second Life isn’t a game, it’s a thing you can make games WITH” angle that used to be there, whatever. It’s a sounder bet than expecting the Facebook hordes to have a sudden burning urge to make stuff.

  • Aliasi Stonebender

    You seem to be confusing “know your product” with “NO NEW USERS, EVER”. The first is wisdom, the second is silly. To again use the Photoshop example, lots of college students use academic copies or pirate it… and then wind up buying it for reals when they get real jobs.
    What Adobe isn’t trying is trying to go to people with no artistic talent and no need to enhance photographs and saying “Hey, you should try out this art-making photograph-enhancing software!”… which is, sadly, exactly what Linden Lab HAS been doing. Selling to a market that doesn’t give a damn.

  • I have to concur with Aliasi 🙂 Bartholomew, one thing is replacing attrition (the churn rate), i.e. as residents leave for whatever reason (even old age and death!), we definitely ought to get new residents to replace them, or face emptying Second Life completely. The current rate of new residents is enough for that, and even provides linear growth at single-digit figures over the years. That’s excellent for any market. Some economists, for example, believe that a tiny bit of inflation is good for real economies — around 1-2% yearly is acceptable. More than that is too much; less is dangerous. Overall growth of Linden Lab’s revenue stream of around 10-15% yearly is more than adequate for the investors; much less than that, and they’re better off by investing in financial funds (even in today’s rotten economy).

    That’s the point of my article: this kind of linear, continuous growth is good in a niche market. It’s good for dealing with the infrastructure; it’s good to make LL a healthy company; it’s good for their investors; and for the less greedy content creators, it means a slightly growing market where they mostly get a return for innovation (new products get plenty of sales if they have adequate quality, but constant innovation is the way to grow sales). So, to recap: of course SL requires a constant flux of new residents to maintain the status quo — because some residents will inevitably leave. Most people in this age get tired of things after 2-3 years (it’s a psychological thing tied to the ever-growing pace of change; most people cannot remain attracted to anything much longer than that), so naturally there have to be new users to replace those that have left.

    But more than that is a serious waste of effort. There are simply no more users out there, and it has little to do with LL’s ability to retain them. Those 18,000 new users that sign in every day are just facing something they dislike and will never find attractive to their own tastes, no matter how excellent the first-hour experience is, or how easy it is to use the SL client, or how eventual improvements bring lag down to acceptable levels (which means these days constantly having 50 FPS 🙂 — because that’s the kind of experience people get on similar, but not equivalent, 3D platforms).

    Second Life is simply not for everybody.

  • I believe the obsession mostly comes from the way the media dealt with the (first) dot-com bubble. We still measure the success of anything based on how steep the exponential curve of growth in new users is. But some products are simply not adequate for the mainstream, and this means that not all kinds of business will have that growth.

    We all (and I include myself in this group!) worked for many years under the delusion that Second Life was that kind of product, but it simply isn’t. Waking up and facing SL for what it is, and not for what the media or others would like it to be, will just make us all (and now that includes Linden Lab and their constant frustration at not being able to capture more users) more content — and ultimately happy — about the kind of environment we have.

  • I agree! In fact, after so many years of laughing at SL’s early claim of being “a platform to create games”, I think we’re way closer to that than ever before. Perhaps Rod Humble can bring his own personal expertise in dealing with “borderline” types of games to see how he can promote SL that way. There is a market for an easy-prototyping kind of platform for 3D games. SL is almost — not yet, but almost — able to successfully deal with the requirements of those games. We might not be able to do very fast-paced MMORPGs with hundreds of users shooting arrows at each other in real time and without lag — but it’s getting there.

    On the other hand, SL is still excellent for purely creative uses. A few friends of mine who are RL artists are still fascinated by what can be done in SL, and have only explored the tiniest slice of the tip of the iceberg.

    And then we have all the other sorts of people who just see SL as their own “adult” type of Lego (that’s certainly my case!!). I loved Lego when I was a kid 🙂 Now I have the equivalent thing which is appropriate for an adult. And it’s so cool because I can play around and pretend to be creative and talk to a lot of people in-world about it at the same time. It’s so much more refreshing than using, say, SketchUp and do some things with it on my own, without interacting with anyone…

    But, alas, I’m quite sure that we all are oddities — millions of oddities, sure, but nevertheless exceptions to the rule. Most people don’t want Legos and don’t want to interact with the Ultimate Lego Sandbox…

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