Understanding Your Competition

Understanding Your Competition

A clear understanding of your competition is key to the success of any business. Even if your product or service fills a unique gap in the market, there are always other companies offering something similar, or there are other ways to satisfy the same customer’s need. The key when thinking about your competition is to learn what makes the customer choose one product or service over another. The different options that customers consider are usually competitors.

Competition can be either direct (competing by selling the same products) or indirect (competing for the same market). The intensity of that competition, whether direct or indirect, will affect the overall potential for success of your business. That is why it's important to consider all types of competition when planning your business, to ensure that you have the edge over others in your industry.

Direct Competition

Multiple businesses offering similar products and services create direct competition. Burger King and McDonald's are direct competitors. So are the grocery store bakery and the patisserie on the same street, or the independent plumber and the local Mr Rooter franchise. 

Customers will likely consider a variety of price points, locations, service levels, and product features when deciding where to buy something. However, not all customers will choose the same combination of those options, and that is essentially why competition exists. By positioning your business to offer a unique mix of options you will be able to reach a different type of consumer. Competing businesses that target wealthy consumers, for example, are not likely to compete on price, whereas competitors for working-class customers may try to offer the same product as their competitors, but at the lowest possible price. Understanding where your competitors are positioned is key to identifying the gaps that your business can fill.

Indirect Competition

Indirect competitors are businesses that offer slightly different products and services, but target the same group of customers with the goal of satisfying the same need. These are sometimes also known as substitutes. 

For example, hunger creates a need to consume food. A customer may choose a local burger joint, grab some take-out sushi, or pick up a frozen pizza from the grocery store and take it home to cook. All three of these products are very different from each other, but they compete indirectly because they all satisfy hunger. 

Almost all businesses face some sort of indirect competition. Service providers, such as web designers, face indirect competition from do-it-yourself services such as WordPress, and even from pre-formatted web templates that can be purchased and downloaded. All of these services satisfy a customer's need to have a web site. By considering all the possible ways your customers' needs can be satisfied, and creating a strategy for handling that competition, you will create a powerful advantage over other business owners who believe they are unique and have no indirect competitors.

One More Example…

A consumer who needs transportation would logically shop for a car. That consumer has many vehicles to choose from, including trucks, compact cars, sports cars and Sport Utility Vehicles. These direct competitors have different prices and satisfy different needs; some are more spacious, some are faster, and some are more fuel efficient. However, the consumer could also choose to buy a bicycle, a motorcycle, or a bus pass; all of these options create indirect competition for car dealerships. Regardless of which option the consumer chooses, his or her need for transportation will be satisfied. Evaluating your consumer's many options will help you assess the level of direct and indirect competition within your industry.

The Bottom Line

There is always competition, no matter the business. There is more than one way to cross a river, but sometimes it takes some creative thinking to figure out how!


About Jessica Oman

Jessica's outside-the-box approach to business plan writing has helped her clients collectively raise millions of dollars in financing to start and grow new businesses. Sign up for her 5-part business plan training series for FREE here so you can get your business plan done and get your money sooner.