(FORTUNE Small Business) – Craig Neidel and Don Dobbs don't mind being considered narrow-minded, but they'd rather you call them focused. That's only fair, considering their success in launching JobsinChicago.com. With neither the financing nor the manpower to go head to head with such established online recruiters as HotJobs.com or Monster.com, the former computer programmer and personnel manager decided to stick with what they know best: the job market within an 80-mile radius of downtown Chicago. "It's a narrow niche," admits Neidel, "but it's one we can serve better than the big guys." The same sentiment is helping create businesses with even more exacting names, like B2BWine.com, Inthecompanyofdogs.com, and JustBulbs.com.

In case you haven't noticed, thinking small is getting big. Companies in the "real" world have been practicing this art for years, pushed relentlessly by category killers like Home Depot and Starbucks and merge-happy giants from Citigroup to Pharmacia & Upjohn. Now a similar Darwinian drama is playing out online as well. Despite the Internet's early egalitarian promise, it has become dominated by heavily financed giants. And these giants have an even broader horizon than the usual mix of categories. The likes of Amazon want to be almost all things to almost all people.

Online or off, companies find they have to burrow into ever narrower niches. Niching is "chapters one, two, and three of marketing 101," says Susan Fournier, a professor at the Harvard School of Business.

The concept of a niche seems pretty obvious: a small corner of the market that other companies ignore or underestimate. But the execution relies on some critical business skills and assets, such as speed, a unique product, and the kind of service that big companies rarely deliver. Happily, choosing a niche helps you do all of this. "It provides clarity and focus," says Fournier. And for many entrepreneurs, the niche is born out of a personal passion, giving them drive as well as direction.

For Ouidad, a hairstylist based in New York City, that inspiration was literally staring her in the face. Now 43, Ouidad ("Wee-dot") grew up in the U.S. struggling with the curly, frizzy hair she inherited from her Lebanese parents. In 1983, she and her husband, Peter Wise, decided that Ouidad's own frustration was the germ of a business and opened a salon exclusively for clients with similar hair, using Ouidad's memorable name. "No one was doing what we set out to do," she remembers. "I knew we had something."

Predictably enough, bank officers didn't agree. "One told me it was a ridiculous idea, and another just laughed," says Ouidad, who dipped into her savings and borrowed from her family to start. Even her landlord was skeptical, forcing her to pay six months' rent in advance. "I still kid him about that," says Ouidad, who's been in the same location for the past 17 years. But she admits business was slow at first. During those lean years, she says, "I would have cut anyone's hair--straight, curly, frizzy, or afro." But she stuck to her original idea, lived by her slogan "Learn to love your curly hair," and slowly built a clientele that included many of New York's curly-haired magazine editors. Soon Ouidad was getting nods in the pages of Allure, Glamour, and Harper's Bazaar. Thanks to good press and repeat clients, Ouidad's salon is now a profitable million-dollar business with 20 employees.

Still focused exclusively on curly, frizzy hair, Ouidad has extended the salon's offerings with her own line of specialty hair-care products that also sell on www.Ouidad.com. She has decided against building more shops. Instead, she is targeting other salons (many still unenlightened about frizz), selling her trademarked products and certifying their stylists. "It's a whole new clientele for us," says Ouidad. She isn't having any problems getting an expansion loan.

Matthew Cole is also seeing big dollars in the business of selling to other businesses. Now that such ventures have acquired a catchy Internet nickname, business-to-business (B2B) companies are the venture capitalist's equivalent of Pokemon. Investors want B2B, and they're willing to bet millions. Cole, a former investment banker and oenophile, even spliced the B2B acronym into the name of his new company, B2BWine.com. His niche: selling wine and services to the $111 billion wine industry's wholesalers, distributors, and retailers. Selling wine to consumers on the Web was already a crowded game when he got started, says Cole. "So our strategy was to go deep, not broad."

And Cole has found that this niche within a niche has powerful advantages. One biggie: instead of having to spend oodles of marketing dollars on a national consumer-ad campaign, Cole can go to trade shows and create specific--and less costly--ads in industry magazines and newsletters. "We can spend less money on ads and more on building the business," says Cole. Investors see the appeal, says Ken Cassar, an analyst with Jupiter Communications. "Investors want profitability sooner," he says.

And that means speed. It's another obvious requirement in the Web economy and another advantage of smaller, nimbler firms. A few years ago, when Sue Levin and Steve Hochman quit their jobs at Nike and Intel, respectively, and started looking at the sports apparel market, they found the same crowded online environment that Cole did. Dot-coms such as Fogdog.com were already fighting for a huge chunk of the $77 billion sporting-goods industry. But they catered mostly to men. Meanwhile, the sudden rush of media attention to female sports stars like soccer's Mia Hamm and the Williams sisters in tennis was attracting people to women's products. Several startups were gearing up to get online.

"Being first to market was very important to us," says Kate Delhagen, a vice president at Lucy.com who came from online research firm Forrester. She'd seen firstcomers dominate their categories, forcing others to play catch-up. So Levin's team got Lucy.com up and running in nine months.

In April 1999, she took Bill Younger of Sutter Hill Ventures to the Stanford Shopping Center in Palo Alto, Calif., to see how bad the selection of workout clothes was; his firm bought in at $4.5 million. Levin tapped acquaintances from her Nike days and hired headhunters and other outside experts to build the staff so that she could focus on raising the additional $3 million the company needed for its launch.

The delegating and fundraising worked. Lucy.com beat the other companies to the Web--just in time for the crucial holiday shopping season. Its performance attracted another $28 million in financing, and Lucy recently signed a deal with AOL to appear on its shopping channels. [AOL plans to merge with FSB's parent company, Time Warner.] And Lucy aims to issue a mail-order catalog later this summer for the back-to-school shopping season. That may sound like Lucy's leaving its online niche, but Delhagen insists it's not. "We may extend our offerings," she says, "but we'll always be known as the place for active women to get great stuff."

While B2BWine, Lucy.com, and other speedy startups have a good head start, their future may well ride on how they play the oldest strategy of "nichemanship": service. Sure, it's a cliche. But building a reputation for expertise and customer satisfaction has kept Southern California's Samuel French in business since 1830. The first in a chain of four bookstores, the Hollywood branch boasts more than 70,000 titles, almost all relating to theater, film, and entertainment. They have the inventory--and they understand it. "When a book comes into our store, we read it," says the chain's Gwen Feldman. "If someone asks for a book on [film] editing, we can suggest two books out of maybe 15." The toughest test for the company came in 1991, when Bookstar, Barnes & Noble's Southern California subsidiary, set up shop nearby. But Samuel French has held its own. "They send people over to us all the time if they don't have a title," says Feldman.

Of course, for every Samuel French there's a Lyle Bowlin. In April 1998, Bowlin decided to launch a virtual bookstore, www.Positively-You.com, from the spare bedroom of his Cedar Falls, Iowa, home. Bowlin carved out a comfortable niche selling self-help and motivational books. But he broadened his selection when his distributor--who also supplied Amazon--offered him the same discount if he sold at least five copies of a title. By November 1998, Bowlin had managed something Amazon's Jeff Bezos has yet to do: He turned a (small) profit. His homey success story made great copy for New York Times columnist Thomas Friedman, who, on Feb. 26, 1999, waxed poetic about Bowlin's David-and-Goliath story.

By noon of that day, about 140,000 people had visited the site, and sales ($500 a month until then) hit $2,000 a day. Buoyed by the response, Bowlin took a leave of absence from his day job as director of the University of Northern Iowa's Small Business Development Center, raised about $90,000, rented office space, hired employees, and dreamed of an IPO. He started undercutting Amazon prices on select books, and he told customers he would donate 10% of their purchases to a charity of their choice.

But just as Positively-You hit a monthly sales peak of $48,500, the bank that handled its credit card sales got worried and held up payments for 60 days. "We had gotten so big so fast, they were worried we wouldn't be able to deliver the books," says Bowlin. Less than a year later, a cash-starved Positively-You went belly-up. A sadder but wiser small business expert returned to his university job. "Our problems began as soon as we left our niche," says Bowlin in retrospect. "We were doing well as a small niche player, but when we decided to go after Amazon we lost our way."

Going from a niche to a broader business model requires a top-to-bottom rethinking of your business, says Harvard's Fournier. "Changing your focus means changing your business plan," she says. Unfortunately, Bowlin was both unprepared and underfunded to take the time to stop and rethink. "We were too busy taking and filling orders," he says.

If carved out properly, niches can provide room to grow. Though Neidel and Dobbs are still focused on their core company, JobsinChicago.com, they are also looking ahead. Just in case their localized approach takes off, they've registered a few more names: JobsinVegas.com, JobsinHongKong.com, and JobsinTokyo.com. Maybe one good niche deserves another.

with reporting by Tara Weingarten