
Imagine you are a company that creates that oft sought after icon, the widget.
You advertise under red widgets, blue widgets and travel sized widgets and sales are doing okay. The red and blue widgets have always been good sellers along with the smaller, more compact, travel widget.
The SEO company that you've hired to improve the online portion of your business conducts extensive keyword research. They discover that not only are red, blue and travel widgets popular but that a significant amount of searching is being done for 'biodegradable widgets'.
It turns out that not only is the keyword phrase 'biodegradable widgets' being searched for, but that there is less competition for that term as well. This constitutes a niche market.
By optimizing for that term you are able to capture some of that traffic and biodegradable widgets become one of your best online sellers. You retire happy.