A declining industry is an industry with an absolute decline in unit sales over time. For example, data recovery services in the US are declining by 9% per year. Companies once backed up their data on tape drives and shipped them to offsite data-storage facilities. Today, cloud computing has largely replaced the need for this service. Therefore, the data recovery services industry is in decline.
Declining industries can, however, create pockets of opportunity for boutique professional service firms. How? When an industry is in decline, large service firms decide to exit the industry as the prospects for growth are no longer attractive. However, there can be professional service niches, or segments, of clients whereby the demand is still strong for the services. These clients get abandoned by the incumbent service provider and are thrust into the market looking for an alternative. Boutique service firms, positioned correctly, can meet these clients’ needs and satisfy this demand—even nabbing clients that are unattractive to large service providers—and thus, grow their firms.
Declining industries present opportunities for boutique pro serv firms that are not available in growth industries. For instance, clients in declining industries are price insensitive. They realize there are fewer firms providing the service and worry more about securing continued service than the cost of the service.
In addition, clients in declining industries stick around longer than clients in growth industries. These clients often have high switching costs, such as regulations, that mandate the need for the service. The service provider supplying this type of client can enjoy long client tenure.
Lastly, there is less competition in declining industries, especially from larger firms. This can make it much easier to win this business, find your service market fit, and earn high client satisfaction in declining industries. With fewer options, clients tend to be easier to sell and serve.
For example, from the year 1900 to 2000, the legal profession grew by 793% when measured by the number of lawyers. Since 2000, the growth rate has only been 1.4%. During this same period, the population growth in the US has increased by approximately 50 million people. The growth of the legal sector has slowed considerably, and when compared to population trends, it is in decline. However, lawyers niched in mergers and acquisitions have seen excellent growth. Why? Merger and acquisition activity is up considerably, creating lots of opportunities for specialist law firms.
There is a specific playbook to run in declining industries for small service providers:
Sometimes large firms do not recognize they are in a declining industry and continue to compete fiercely. At times, large firms cannot exit a declining industry because of high fixed costs, difficult-to-shed assets, debt tied to the business, and the business unit in the declining industry being strategic to another business unit. Existing firms with high exit barriers will not leave a declining industry, and therefore, the opportunity for the small niche player does not emerge. Find an industry where the exit barriers and fixed costs are low. If the same firms are continuing to dominate the industry, it likely isn’t the right declining industry for your firm.
A declining industry is often broadly specified. Within it, there are multiple segments, some of which will remain attractive to niche service firms. This is often called a niche strategy, but it is effective in a declining market because niche segments of a declining market can still be thriving, or even growing, and a steady profit can be made.
What is unique or characteristic of these clients? Once you’ve determined the common features causing them to be dropped, tailor your sales and marketing approach to this niche. Approach these clients with a value proposition of continued uninterrupted service.
These clients are not looking for innovation; instead, they want the continued service they were denied by being dropped by the previous firm. Lastly, be sure to create switching costs with these new clients. This can come in the form of multi-year, non-cancelable contracts, and other forms of switching costs. This will provide the boutique professional service firm with the support needed to stay in the declining industry.
It’s easy to assume that a declining industry is too risky to operate in, but if you look beyond the exterior, you’ll find opportunities within professional service niches. With these tips, you’ll know how to identify opportunities in the market and provide continued service for loyal clients.
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