With rapidly improving sequencing technologies, scientists have recently gained the ability to examine diverse microbial communities at high genomic resolution, revealing that both free-living and host-associated microbes partition their environment at fine phylogenetic scales. This 'microdiversity,' or closely related (> 97% similar 16S rRNA gene) but ecologically and physiologically distinct sub-taxonomic groups, appears to be an intrinsic property of microorganisms. However, the functional implications of microdiversity as well as its effects on microbial biogeography are poorly understood. Here, we present two theoretical models outlining the evolutionary mechanisms that drive the formation of microdiverse 'sub-taxa.' Additionally, we review recent literature and reveal that microdiversity influences a wide range of functional traits across diverse ecosystems and microbes. Moving to higher levels of organization, we use laboratory data from marine, soil, and host-associated bacteria to demonstrate that the aggregated trait-based response of microdiverse sub-taxa modifies the fundamental niche of microbes. The correspondence between microdiversity and niche space represents a critical tool for future studies of microbial ecology. By combining growth experiments on diverse isolates with examinations of environmental abundance patterns, researchers can better quantify the fundamental and realized niches of microbes and improve understanding of microbial biogeography and response to future environmental change.