Pursuing Underserved Markets As A Path To Differentiation And Disruption

What does underserved mean? If a market is obviously underserved, an existing player in the market would fill the void. If one chooses a niche in an easy-to-identify growth area, keep in mind that competitors can easily find this niche too. Expect a lot of competition. But this isn’t necessarily always the case. Instead of going for an obvious niche, some are willing to take a chance and pick a less obvious niche.

In many cases the niche remains underserved because the niche is seen as prohibitively expensive to pursue or not worth the effort by established players. Yet many great products and companies have been created by an entrepreneur’s discontent with the status quo. Fred Smith wondered why letters couldn’t be delivered overnight when he conceived FedEx. While traveling in Italy, Howard Schultz wondered why European-style cafes wouldn’t work in America.

Take ratings agencies in the financial service industry. To most this would appear to be a safe and boring market with only tradition and habit serving as a barrier to entry. After all SEC regulations require third party ratings evaluation and often specify using one of the big three players—Standard & Poors, Moodys, or Fitch which dominate 95 percent of the overall market.

On the heels of the financial crisis which saw the big ratings agencies shower investment banks with dubious AAA ratings on risky mortgage-backed securities, Jules Kroll and Jim Nadler launched Kroll Bond Ratings Agency (KBRA) with a view of going deeper with its research and providing more thorough investigation and accurate understanding of the enterprises it rated. The big three had so much business they barely noticed the new entrant.

The financial crisis beginning in 2008, however, upset the cozy relationship. The big agencies were sued by investors for ratings that proved undeserved and unsustainable, causing the big players to pull back. In many cases their ratings became formulaic and perfunctory to avoid risk exposure. To further reduce risk they avoided rating some markets altogether. Local and regional banks, for example, were virtually ignored because they were perceived to be too small to bother with. KBRA thought otherwise and pursued this market virtually unopposed. Today it dominates this niche. Airports are another market Standards & Poors and Moodys wouldn’t touch them even though there has yet to an airport facility that has failed. KBRA recently evaluated Dallas-Ft. Worth Airport and is on a path to rate several more extending its reach in a niche the big three abandoned.

“In many cases the niche remains underserved because the niche is seen as prohibitively expensive to pursue or not worth the effort by established players.”

Since its inception in 2010, KBRA has rated over 1,225 issuers and transactions encompassing more than $755 billion in structured deals, public finance and project debt. Fitch’s has reportedly taken note and indicated that it is reviewing its approach in how it conducts its own ratings. In pursuing underserved markets KBRA has disrupted its competition and carved out a  niche and became a market leader in these and other segments such as aviation asset-backed securities.

Another example is the animal healthcare, which has been a backwater of the giant healthcare market. For the most part veterinarians were using analogs of cast-off drugs for  animal health. Two biotech veterans launched Kindred Biosciences, a San Diego startup, to build one of the first companies to develop bio pharmaceuticals for the companion animal market—one that is virtually open territory.

There an estimated 80 million dogs, 90 million cats and about 10 million horses in the U.S. According to the American Pet Products Association (APPA), total pet industry expenditures in the U.S. reached $60.59 billion in 2015. That’s up from $58.04 billion in 2014. When the Great Recession hit, Americans cut back on spending and tightened their belts. However, spending on pets barely declined. In fact, it was pretty much recession-proof. Pet spending appears to be remarkably resilient in the face of economic downturns. Americans spent an estimated $15.73 billion on veterinary care in 2015. According to an APPA survey, dog-owners spent an average of $235 on routine vet visits in 2015, cat-owners $196. What’s driving those costs? In part, it’s the rise of more expensive procedures, including surgery and MRIs for pets. But it’s also due to changing social norms.

According to a recent online survey 70 percent of pet owners (dogs and cats) allow their pet to sleep on the owner’s bed compared to 40 percent just five years ago. In addition many Millennials report that prior to having children couples typically buy a pet. Tapping into this expanding relationship with furry companions, Kindred Biosciences recently gained FDA approval for Mirataz, a drug that treats cats that have stopped eating. Felines that stop eating are the number one reason owners take their cats to the vet.

Mirataz is administered by rubbing the gel onto a cat’s ears, avoiding all of the issues that typically come with medicating a cat with pills, including the need to accurately split pills and the difficulty associated with getting cats to take medicines, especially in cases where cats won’t eat anything. And, because the medicine gives the cats an appetite, it allows vets to focus on diagnosing the underlying issue that is causing the lack of appetite.

Though nine million cats are “inappetent,” only three million get treatment because of the difficulty of administering traditional therapies. Right behind Mirataz the firm is launching Zimeta, a drug specifically designed to treat fever in horses, one of the leading causes of illness in that species.

Since going public in 2013, Kindred Biosciences has enjoyed several advantages. Its drugs cost only about $5 million to produce—a fraction of what it costs to produce a drug for humans.  It has regulatory exclusivity and an innovative transdermal technology that gives it a 10 year lead on competitors. The firm was created by an expert in drug antibodies, Richard Chin, who worked at Genentech and was responsible for half its pipeline portfolio, and Denise Bevers, an expert in clinical operations for Elan Pharmaceuticals. All protein engineering is done in-house.

Chin and Bevers also enjoy two forces that create a wind at their back. The market for animal remedies has come into its own and the cost of antibodies has dramatically come down. “It’s only a matter of time before a Genentech or Amgen-like company comes into the space for animal health,” observes Kindred Bio’s CEO Richard Chin. “Due to the growing prevalence of type 2 diabetes, liver damage, and respiratory problems in companion animals. We see more companies becoming attracted to this market.”

Harvard’s Clayton Christensen once described underserved markets as a form of disruption that can serve as an ideal path to growth. Many markets become oversaturated with small businesses or startups eager to get in on the action. But for a business niche to really stand out, it should be underserved or even neglected, said Cody McLain, CEO and founder of WireFuse Media. By definition niche markets require a narrow focus and a clear idea of how to bring value to customers  that are being poorly served.

Related: How A Sense Of Urgency Can Fuel Success