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Sizing Up the Competition

By Toolkit Staff | July 03, 2012

Conceptually, all of marketing is based on the idea that you must thoroughly know the environment in which your business operates in order to successfully promote and sell your product or service.

All successful business owners know their markets, competitors, customer wants and needs, and "what it takes to be competitive." To help you become a successful owner, let's look at what you should know in particular about your competitors.

Identifying your direct competitors is important before you finalize your decision about which business category and market segment to compete in. It is vital to the success of a new or existing business because it reduces risk, time, required resources and expense.

It may help to think of your competitors as a series of concentric circles, like a bulls-eye target. In the center are your most direct competitors, and moving outward from the center the competition grows progressively less direct.

  1. First ring, center of target -- the specific businesses in your geographic area that offer a product or service that's interchangeable with yours in the consumer's eyes (although of course you hope you hold the advantage with better quality, more convenient distribution, and other special features). For example, if you operate a local garden center, you may compete against the other garden centers within a 10-mile radius.
  2. Second ring -- competitors who offer similar products in a different business category or who are more geographically remote. Using the example of the garden center, a discount chain that sells garden supplies and plants in season is also your competitor, as is a landscaping contractor who will provide and install the plants, and a mail-order house who sells garden tools and plants in seed or bulb form. None of these competitors provides exactly the same mix of products and services as you, but they may be picking off the most lucrative parts of your business.
  3. Third ring -- competitors who compete for the "same-occasion" dollars. To the extent that gardening is a hobby, third-level competitors might be companies that provide other types of entertainment or hobby equipment; to the extent that gardening is a type of home-improvement, competitors might be providers of other home-improvement supplies and services.

The point of this analysis is to consider carefully, from the buyer's point of view, all the alternatives that there are to purchasing from you. Knowing that, you can attempt to make sure that your business provides advantages over your competitors, beginning with those who are in the most directly similar to you. In fact, you can even borrow ideas from second- or third-level competitors in order to compete more effectively against your first-tier competitors.

It's to your advantage to know as much as you reasonably can about the details of your competitors' businesses. Study their ads, brochures and promotional materials. Drive past their location (and if it's a retail business, make some purchases there, incognito if necessary). Talk to their customers and examine their pricing. What are they doing well, that you can copy, and what are they doing poorly, that you can capitalize on?

Secondary data, as well as information from your sales force or other contacts among your suppliers and customers, can provide rich information about competitors' strengths and weaknesses. Basic information every company should know about their competitors includes:

  • each competitor's market share, as compared to your own
  • how target buyers perceive or judge your competitors' products and services
  • your competitors' financial strength, which affects their ability to spend money on advertising and promotions, among other things
  • each competitor's ability and speed of innovation for new products and services

There may be a wealth of other facts that you need to know, depending on the type of business you have. For example, if you're in catalog sales, you'll want to know how fast your competitors can fulfill a typical customer's order, what they charge for shipping and handling, etc.

Once you know the identity of your most direct competitors, and have a good idea as to who are your second- and third-tier competitors as well, you should give some thought to which actions they are likely to take in the next year or so. Estimates of competitors' future activity depend on your knowing and understanding their objectives, strength in the marketplace and resources. This important intelligence is key to your company's:

  • annual forecast of sales, spending and profits
  • promotion and advertising programs
  • introduction, support and success of new products and services
  • market, product or service category, and sub-category trends
  • direction for future growth

Gathering competitive intelligence can be the difference between realizing your company's annual plan and losing business that may never be recouped.

Marketing

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