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I don't think it's much too different online as well,
Zappos has it's own market of over $1B in sales per year - by offering shoes and handbags (and now few other related niches) along with great customer service.
They did start off as a small niche e-retailer few years ago, For any business to sustain, it has to have growth, When zappos started, Amazon had already begun selling apparel, but zappos, shoebuy, shoes.com, ebags etc found their own markets and are growing every year. There is room for everyone in online retail, as long as e-retailers are not just in for the money, but to build something that online shoppers will appreciate and like.
This "something" can be anything. Sometimes, it is simply a range of products that can't be found at the big stores, sometimes as simple as great customer services, quicker delivery or even a very well designed website,
Ultimately, I think niche e-retail is not about running a small business and surviving in the midst of bigger players, but about starting a small business and making as big as it can be.
While they don't "officially" offer free overnight shipping, there have been reports ever since they discontinued the offer of them surprising customers by shipping orders overnight.
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