10 questions before entering niche markets

Niches have a good reputation: high margins, little competition, loyal customers. Some live up to it. Others are simply small. These ten questions tell the two apart before capital is committed. They are deliberately uncomfortable.

1. How big is the market, really? Market sizes from studies are rarely reliable. Build it bottom-up: how many customers are there, what do they pay, how often?
2. Why do customers stay? Switching costs, certifications, integration into workflows, trust. A customer who stays only for the price will leave for a lower one.
3. Who sets the price? Pricing power shows in margins that hold through cycles and inflation. The last few rounds of price increases say more than any presentation.
4. How concentrated are the customers? If a large share of revenue hangs on one or two names, the niche is thin, however good the margin looks.
5. What keeps competitors out? Expertise, licences, networks, economies of scale. If none of these is in play, competitors will come, just later.
6. What does AI do to this niche? The honest question: is the service automated away, or does AI make it better and faster? Where expertise, accountability and relationships count, resilience is higher. That is a hypothesis, and it needs testing.
7. How fragmented is the supply side? Many small providers open the way to a Buy-and-Build, but only if the add-ons fit together and can be integrated.
8. How dependent is everything on individuals? The founder, the head of sales, the one specialist. Who leaves once the company is sold, and what stays?
9. How does cash flow come about? Cash conversion, capex requirements and Net Working Capital decide how much of the earnings reaches the investor.
10. Who buys later? Tomorrow's buyer must be identifiable today: strategics, financial investors, management. Without one, the exit is a risk.

The best niche is one where customers would stay even if it were cheaper elsewhere.

How to weight the answers

Not all ten need a positive answer. Three are critical: customer loyalty, pricing power and dependence on individuals. A company that passes those can afford compromises on the rest. A simple traffic-light grid, one light per question, shows quickly where to dig deeper and where entry makes sense only with conditions.

The questions belong at the start of the review. They point Due Diligence at customer contracts, margin trends, competition, organisation and key people, which is where value is actually decided.