Niche Market Pricing and Strategies for Maintaining Price Premiums

Overview Developing products that not only add value but also increase profitability is the goal of virtually all niche food and agricultural product producers and manufacturers. Large-scale food product manufacturers often accomplish this goal through several strategies, including undertaking market research to identify relatively large segments of the market to serve as potential customers, establishing brand recognition (equity) through advertising and promotion, and establishing trademark and product protections. These strategies are typically expensive processes that require a sizable sales volume in order to be effective and profitable. Large firms have the ability to identify markets that are large enough to allow them to produce a low-cost high volume product. This strategy does not work for small niche markets, as smaller manufacturers generally have higher per-unit costs of production than larger manufacturers, which makes competition with large firms in large market segments difficult to impossible. As a result, smaller companies often find more success in identifying relatively small market niches that the larger firms ignore because they do not allow large firms to take advantage of economies of scale in production, processing, and marketing. Without making too broad a generalization, this means that large firms need to operate in large markets in order to effectively eliminate competition from smaller firms; while they also need brand equity, obtained through advertising and promotion, to effectively compete against other large firms in the large markets. This often leaves opportunities for smaller firms in food product manufacturing and marketing to compete in relatively small markets that the large firms must essentially ignore. Note that “large” and “small” are relative terms and even small market segments can be quite large to very small. Although small firms typically will not have to compete with large firms in smaller markets, their job remains the same: defining a market for the product (could be based on consumer income, location of production, and other unique product characteristics); establishing a recognized (sometimes referred to as “differentiated”) product; and using this product to effectively compete against similar products in the market. All this needs to be done profitably, meaning the cost of developing, producing, and marketing the product needs to be less than the revenue received from sales of the product. “Niche marketing” is a term often used to describe this process. This fact sheet will discuss price behavior and how prices change over time, strategies small producers may consider to maintain their competitiveness in a market, and how to examine the feasibility (or expected profitability) of a potential market and/or product. More information about market segments can be found in WEMC FS#2-08, “Evaluating Market Size,” while