This week we are looking at Competition in your market analysis. Here is the market analysis template again, for your reference.
- Description of Industry
- Industry Trends
- Market Segment(s)
- Distribution Channels
- Direct & Indirect Competition
- Strengths & Weaknesses
- Company Profile
- SWOT Analysis
Determine who your direct and indirect competitors are in the target market you will serve. What’s the difference between ‘direct’ and ‘indirect’ competition? Direct competitors offer the same type products as you and operate a similar business in the same market. If you own a local diner serving breakfast and lunch to locals your direct competition would be other small, quick-service restaurants, fast food establishments and maybe coffee shops and convenience stores. They all offer a quick meal at a low or reasonable price. Your indirect competitors are grocery stores, fine dining establishments, national companies that deliver food frozen or specially packaged foods via mail or delivery service. These type companies all provide food, but it’s not a quick, inexpensive breakfast or lunch meal.
Make a list of the direct competition within your geographic market. Understand how they do business, the types of products or services in which they specialize, and to the best of your ability, their strengths and weaknesses. That is, what do they do well and not so well?
I find it helpful, especially in markets where the location of the company is an important factor in the consumers’ decision to buy or not buy, to mark each competitor’s location on a map. This specific location reference can help you identify strengths and weaknesses that are geographical in nature and that might not be obvious at first. Pay attention to traffic counts and demographic patterns in the market.
Also make a list of your indirect competitors. Their presence and obvious strengths and weaknesses will help you identify niches in the market and develop strategies to leverage your strengths or your competitor’s weaknesses.
Don’t think for a moment that you don’t have any competition. It’s not true. You have competition. Even if there is a brand new market emerging, someone else can mobilize in reaction to it with more people and more money than you. That you’ve poured your heart and soul and maybe life savings into this venture is irrelevant. Your competition is in the business to make money and you now represent a threat to them.
How will you differentiate yourself and your business from every other business in your market segment? This question is at the heart of your business model, your product or service offering and your distribution channel. How will you do business better, smarter, cheaper, faster or more responsive to customer needs than your competition? Be careful of going for the cheaper angle. Your biggest competitors probably have much better cost models than you and could easily destroy you in a price war. Customers don’t always respond to the cheapest price model in the ways you would expect. You have to carefully consider your market segment, what your competition is doing, how they price and go to market and then find your niche in an under-served segment.
Can you make money in this business? After looking at your direct and indirect competitors, now is a good time to look at their pricing compared to your pricing. How does your cost to produce the product or service relate to the prices your competition charges? What are the advantages and disadvantages of pricing higher or lower than your competition?
For a small business, it is highly unlikely that you will be able to move the market to your costs. Unless you’ve discovered a way to make the product or service at significantly reduced costs, you should probably assume that you’ll have to charge a price similar to your competition. If you think you can produce the product at a significantly reduced price, you should go back and confirm your numbers. Ask yourself, what’s different about the way we will make the product and go to market that allows us to do it a reduced cost? Make sure you understand all the costs involved in going to market. Many large companies have whole teams of engineers and accountants studying cost reduction and best practices in manufacturing so that they can tweak another penny or nickel out of their costs. You don’t have that kind of team and couldn’t hope to buy in the quantities of your biggest competitors, except in rare circumstances.
Is it really an advantage to be the cheapest seller in the market? For many consumer products, Wal-Mart is the price leader. And with revenues in the hundreds of billions of dollars through 8,000+ retail outlets, you’ll never be able to compete with them on price. And do you really want to try? Having the lowest price may work against you depending on your market. If you are selling consumer products, then you’ll need to be at least competitive with your pricing. But if you’re selling high-tech scientific services, low prices may give your target customers the feeling that you aren’t very good at what you do. The point is the price you charge for your products or services should be part of your strategy. Which market segments you serve, which customers you target, the specific product or service you offer, how you go to market and what prices you charge are all part of your model and should be thought about carefully with the end result of serving your target customers in mind. Don’t pick any of those strategies haphazardly.
Stay connected with us on social media and our blog. Next week we will look at analyzing customers.