You Must Understand Your Competition

Filed under Marketing Overview. Fact checked on May 24, 2012.

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Do you know who your real competitors are? Learn how to identify key competitors to better position and sell your products or services.

Identifying your 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.

For example, a new salty snack chip product may have a unique taste, texture, appearance and health benefits. But effectively competing with every salty snack (both direct competitors like salty chips and indirect competitors like popcorn, salty nuts, etc.) in a $14 billion product category is difficult, even for a large, successful snack food company like Frito-Lay. If the competition is too strong, it's going to be extremely difficult for a newcomer to break in. It may be more profitable to carefully target a specific segment of a category where the odds of success are greatest. Even the tortilla chip segment of the salty snack category is over $3 billion in size. Perhaps "healthy multigrain snacks" would be a more manageable segment of the salty snack category at around $200 million?

Even established businesses need to periodically reevaluate their direction in relation to competition. For example, we know of a local appliance chain with a very long history and a strong base of loyal customers. The chain's management recently gave the go-ahead on a brand-new "superstore" showcase at great expense. Although business was very strong, the chain decided to shut down when it learned that two national chains were planning to enter the local market in the coming year. The local chain realized it wouldn't be able to win a price war and decided to quit while it was ahead.

In order to compete effectively, you need to be able to answer these questions:

  • Who are your competitors?
  • What are your competitors' strengths and weaknesses?
  • What are your competitors planning to do next?

Identifying Your Competitors

Your competitors are not always who you think they are.

For example, if you are a manufacturer of popcorn products, your direct competitors are probably other brands of popcorn in the market. But what about tortilla chips, peanuts, snack mixes, or potato chips? And what about rice cakes, candy bars, cake/pie items, rolled candy, gum, or frozen confections? The target consumer may be making a choice among all these items for a "snack" purchase, including popcorn. Or the target buyer may be considering a drink purchase among alternatives for a "snack."

Your company must narrow the choices and decide which industry, product or service categories, brands, geographic areas, channels of distribution, etc., to compete in. Without this knowledge and analysis, your marketing programs will not be effective and efficient, particularly if you have a very limited budget.

Competitor Levels

It may help to think of your competitors as a series of levels, ranging from your most direct competitors to those who are more remote.

  1. Direct competitors. These competitors offer a product or service which is interchangeable with yours in the eyes of the consumer. In the popcorn example, above, the direct competitors are those companies selling popcorn. If you are an accountant, then your direct competitors would be other accounting firms. Or, if you operate a local garden center, you may compete against the other garden centers within a 10-mile radius.

  2. Substitute or alternative competitors. These competitors offer similar products in a different business category or are more geographically remote. As seen in the example above, the popcorn vendor is also competing with potato chips, corn chips, and tortilla chips. The accountant may be competition with "off the shelf" accounting and tax software. 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. "Available spend" competitors. These competitors compete for the "same-occasion" dollars. In this case, the popcorn seller may be in competition from the soft drink or an ice-cream vendor. Inasmuch as gardening is a hobby, third-level competitors might be companies that provide other types of entertainment or hobby equipment; inasmuch as 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.

Identify Your Competitors' Strengths and Weaknesses 

You should be very aware of your direct competitors—in many cases, you'll know them by name and may even belong to the same business associations they do. If you don't know much about their business operations now, make sure that you do soon. It's to your advantage to know as much as you reasonably can about the details of their 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. Learn what are they doing well and what they are doing poorly.

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.

Every competitor has definitive weaknesses and strengths that may be points of potential advantage for your company and products. In most cases, larger companies cannot make decisions or allocate resources, personnel, and materials as fast as a smaller company under changing market conditions. Smaller companies may have to be content with a limited, but profitable, objective of taking what they can from the market before larger competitors catch up later.

It is also important for smaller companies to decide when the cost of direct competition is both unwise and ineffective. For example, a small, local soft drink company cannot afford to match every new flavor and size of soft drink that larger national companies introduce and support with marketing programs. It must develop its own unique flavors and stick to selling and distributing only the sizes that sell rapidly in its own markets, with limited marketing spending support.

Is the Cost of Competition Too Steep?

Obviously, your most important objective as a small business is to survive and make money. Realistically speaking, there may be times when you'll decide, after careful analysis, that the competition in one area is simply too formidable. Here are some situations that may indicate that the cost of direct competition is unwise and ineffective, from a sales and marketing perspective:

  • When you are faced with taking a loss on any marketing program. Breakeven spending should also be avoided when done in response to competitive programs.

  • When your direct competitor can outspend you both in money and quality of the offer. Larger competitors can almost always outspend you whenever you try to match one of their programs. They can spend more money for longer periods and increase the depth and quality of their discounts and promotional programs.

  • When your competitor's resources are significantly larger and more effective. It may make little difference if one of your direct competitors has eight sales people and you have six sales people covering the same geographic area and accounts. However, if your competitors can deliver programs faster on a broader front and still not commit all their forces, you are significantly outgunned. No battlefield general or business manager should risk a head-on confrontation.

  • When your competitor has more strategic and tactical advantages. Equal competitive resources may still be strategically and tactically more advantageous than your company's resources. For example, a competitor who spends the same amount in the same media but has higher recall/better-liked advertising has a strategic advantage. Or a competitor who has strong distributors in all your company's markets, while your company has a few weak distributors in the same markets, has a tactical advantage.

Can You be The Low-Cost Provider?

Businesses based on the idea of providing less expensive products and services to customers can be extremely competitive. One problem such companies face is that the customer base is not loyal and will rapidly switch to another company depending upon what is on sale. Companies that successfully occupy low-cost niches frequently have many resources and a large size to weather these rapid switches by customers. They may be so large that the cost of a competitive company entry keeps the number of potential competitors down.

Example

United Parcel Service has its own fleets of planes, custom-designed delivery trucks, and distribution centers, which keep competitors from easily entering the market and obtaining a price advantage.

While UPS is known for its low rates, it is also widely regarded as one of the best service companies in the world. UPS strives to create sources of business uniqueness (product differentiation) to maintain customers in the face of price discounts from competitors. UPS has well-trained personnel and service at all levels (e.g., instant computerized answers to customer inquires). It also provides free computers, printers, and other automated equipment to customers as an added service, which again raises the cost of competing with UPS by a competitor.

On the other hand, UPS is also "infamous" for rough package handling. The UPS package "drop test" requirement for package strength and interior construction is a vulnerability in their product differentiation. Companies that ship fragile items like computers, glassware, and liquids often chose other carriers, even at higher expense. Thus, there may be a niche for smaller companies to enter the package delivery business, if they can provide "kid gloves" treatment of packages.

In some cases, the market may be large enough for only one company to occupy the niche. For example, a low-price general clothing store chain might locate its stores in low-income Chicago neighborhoods. There are not enough customers for more than one chain of this type in the Chicago market. However, a would-be competitor might try to copy this formula in another city.

The best protection for long-term success, where low price is a cornerstone of your product differentiation, is to:

  • Be the first company to preempt this low-price niche.
  • Have a unique idea as the basis for your product or service business.
  • Surround low price with as many secondary sources of product and service differentiation with your competitors as possible.

What Will Your Competitors Do Next?

Once you know the identity of your most direct competitors and have a good idea as to 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 of 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. To be successful in identifying competitor's strategies and tactics, you must gather every bit of available data from sales forces, outside consultants, market surveys, and trade associations. For example, the data that you look at may include pricing, promotion and advertising spending, new product introductions, sales results, market share trends, packaging innovations, key account management, service levels, and other indicators of competitive activity in the marketplace.

The observance of competitive strategies and market tactics can be the basis for understanding a competitor's objectives. Is it simply profits and growth? Or could it also include "owning the market," driving other competitors out of the market, or being first in new markets and international markets?

Understanding each competitor's behavior in terms of short- and long-term objectives, strategies, and tactics will be extremely important to survival and success, in business as on the battlefield. And many of the marketing programs mimic battlefield moves. Dividing competitive forces among different markets, flanking attacks in weaker markets, direct frontal assaults with spending, new products and pricing across all market segments and product lines, and converting the enemy's best soldiers to your own company forces are all examples of tactics that may be open to you.

And, we can't stress strongly enough that you don't need a huge marketing budget to become knowledgeable about your competition. Here are some strategies that every small company can consider using:

  • Visit your direct competitor's stores, customers, suppliers, convention booths, and sales personnel.
  • Gather secondary data on the competition from trade associations, publications, conventions, customers, and your own sales force.
  • Make a short list of possible competitive strategies and tactics for the current year, and your retaliatory strategies and tactics, including situations to which you will not respond.
  • Analyze your competitor's products regularly for improvements, weaknesses, and quality trends.

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