In today's ever-evolving market landscape, small businesses need to pinpoint their niche accurately and efficiently to ensure long-term success. However, while recognising the need for a customer niche is a key first step, actually developing a business that can locate such a niche is another task entirely. Finding a market niche in today's world requires adopting a modern, scientific strategy. 

This article presents such a scientific model for niche locating. This model involves constructing a hypothesis, gaining preliminary evidence for the hypothesis, building a product to advance your hypothesis, and testing to gather information about the validity of your hypothesis. This simple four-step process will allow you to not only locate your niche but dynamically build a product that they need. 

Step One: State a Business Model Hypothesis

This business philosophy was first outlined by Steve Blank in his book The Four Steps to the Epiphany. This begins with a business model hypothesis. A business model describes how a company captures value. Basically, it describes, on paper, all of the processes, structures and products of a business. This allows you to explore and experiment with all of your business ideas without adopting the risk of actually building the business. The tools for developing better business models are outlined in online MBA courses.

The business model hypothesis is akin to a scientific hypothesis. You want to sit down, with a laptop or pen and paper, and take a best guess at what a given customer base would find valuable. You will often have somewhat of an idea because you too will find this valuable. This value usually comes in the form of a solution to a problem. Be sure to capture all your ideas and assumptions regarding customers, product pricing, sales pipelines, company structure, etc. 

Step Two: Test Your Hypothesis

Once your business model hypothesis is established, the next step is testing it to see if it holds water. The power of this step is in how little financial risk it requires. Remember, the business model hypothesis is no more than some scribbles on a paper. This does, however, require you to ‘get out the door’ and go talk to potential customers about your idea. 

This process allows you to go beyond your limited first-person perspective and derive information from those real people who will one day be your customers. Once you have gained this information, sit down and reflect on your hypothesis. Which assumptions were held, which were rejected, what novel ideas didn't you consider and what part of the problem did you not see? It is important to be ruthless, and egoless in this process. 

Step Three: Develop and Test an MVP

Now that you have developed and refined a business model hypothesis, it is time to instantiate this hypothesis in a real-world product. This product is called a Minimum Viable Product (MVP). The purpose of an MVP is not to have a well-refined costly product, and a big launch party to boot. Instead, you want to develop this MVP as quickly, and as cheaply, as possible whilst solving the problem identified in the hypothesis. 

An MVP allows you to launch your product with enough features to satisfy early adopters while minimising costs. The feedback from this initial offering is invaluable, as it provides direct insights into how your target market perceives your product and what improvements are necessary. 

This, like the business model hypothesis, is not designed to beat the world. It instead allows you a platform to iterate towards a world-beating product. The trap for most business owners and product developers is that they want to begin the process with a killer product. In reality, these products are almost always far too costly and do not capture the value they expect. As such, all parties lose their investments as the product goes up in flames. Developing and iterating on an MVP however, allows you to progress towards a killer product whilst minimising undue risk.

Step Four: Pivot or Proceed

What, then, is the process of iterating towards a killer product? In short, ask clear, well-defined, simple questions that when answered tell you to either pivot or proceed. Firstly, business owners and product developers usually flex their intelligence and creativity by asking complex deep questions. Such questions yield complex and deep answers. The problem with this is that these answers are impossible to integrate into an MVP.

Instead, owners need to ask a number of simple and clearly defined questions with predictable answers. For example, “Does this product solve X problem?” The customer can really only provide a yes or no answer. Alternatively, if your product has multiple features, you might ask, “Which features did you use the most?”. These questions instantly give you actionable data that can be integrated into product design.

This integration comes in the simple form of pivoting and proceeding (some call this doubling down). If a customer responds positively to a product or feature, then you know not to change that product or feature. However, if they respond negatively, go back to the business model hypothesis, locate the source of that issue, and change it. Integrate that change into the MVP, and then retest that product. 

This feedback loop, developing-testing-pivoting, is the cornerstone of finding a market niche. The shortness of this feedback loop is often used as the key measurement to predict the success of early-stage businesses. 

By systematically following these steps—stating a hypothesis, testing it, developing an MVP, and deciding whether to pivot or proceed—small businesses can significantly enhance their chances of finding and successfully exploiting their niche market. Each phase builds on the previous one, providing a clear path forward and enabling business owners to make informed decisions that align with both their business goals and market realities.