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The art of choosing a niche is to be able to differentiate yourself from your competition.

When choosing your niche, there are 3 things to consider. Your service offering... which target client type is most profitable to you... and who your competition is.

As a rule, I don't like books and lessons that make you fill out charts and tables... but this type of diagram can help you define which niche, you want to target.

The x axis shows number of clients. Fewer clients on the left and more on the right. The y axis shows the type of client... in this case, high margin clients on the top and low margin on the bottom... meaning that high margin clients pay more.

Next place a circle representing your business in the appropriate quadrant. Now place different circles that show your competitors. If you want, you can make the size of the circles indicate the market shares... big gets more clients, small fewer.

To evaluate - first if you are in the bottom left quadrant- that's not good. Few customers, low margins... let's just make work as difficult as possible. If you're in the top right quadrant with few competitors, well all right... you should be on easy street. If you're not, there's probably something wrong with your execution. Now if you're in the bottom right, you need lot's of clients and and efficiency. That means money spent on marketing and infrastructure.

In any case, if you are surrounded by tons of competitors and struggling for clients, you need to either choose a different target quadrant, or find a way to differentiate your service from the pack.

One last thing about competition. Your biggest competitor might be your client. Think about tax service providers competing with individuals that do their own taxes. In order to compete with free, you need to sell added value.