Pure-play models are vulnerable to competitors who can subsidize your category
If your business sells only one category, competitors who carry your category PLUS other products can sell your category at a loss (or zero margin) and profit elsewhere. This makes price competition impossible - you're competing against their entire business model, not just your category. Diversification or differentiation (non-price value) are the only defenses.
When to use
When large multi-category retailers enter your specialized market. When evaluating whether to remain pure-play or expand into adjacent categories. When competitors start aggressive pricing you can't match.
Don't do this
Trying to win on price when competitors can subsidize. Assuming customers will pay premium for specialization when alternatives are 'good enough.' Fighting margin wars you can't win.
1 Founder Who Did This
Holiday 2017: Walmart, Target, Amazon sold toys at such low prices Toys R Us couldn't compete. These companies profited from other merchandise and could afford toy losses. Toys R Us called it 'the perfect storm.'