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Of course you should go Niche. A niche at a time.
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I like that - It makes sense.
I also think 'going niche' does not necessarily mean offering a new product or service. If you can build a site to be friendlier and more convenient then you are always going to get visitors returning.
We spent a long long time building the database for a client selling power tool spare parts online. We made it easy for the end user, exploded drawings and parts listings for all major brands of power tool. People have told the company how much they like using the site, being able to print of these pages for future reference etc.
I guess what I am trying to say is that a new site can compete in a current online market if the website build is effective and friendly, and the 'niche' doesn't have to be the actual products/services but what the site itself supplies.