- What is a direct competitor?
- Why is it important to understand your direct competition?
- How to win new markets from your competition
Q: What are the main types of business competition?
A: In business, the types of competition are categorized into indirect and direct competition. Indirect competition seeks to solve the same problem for consumers with a different solution. Direct competition seeks to solve the same problem with the same solution.
Competition is the force that drives nearly everything in the marketplace.
Competition is what makes businesses and brands strive for innovation. It forces entrepreneurs to constantly adapt and evolve, bringing exciting new advancements to life.
The competition also spurs marketing efforts and discoverability. Businesses have to invest in marketing to beat out other businesses offering the same products or services.
While all competition drives the market, direct competitors bring these issues into even greater clarity.
Direct competitors compete head to head, forcing faster innovation and greater emphasis on growth. The close nature of this type of competition means businesses need to be as efficient as possible.
But despite the great importance of direct competition in business operations, many business owners fail to thoroughly understand their direct competitors.
While understandable, this mistake can cost you new opportunities and see your target demographic stolen away.
These things don’t have to happen though. Gaining a basic understanding of your direct competitors gives you the tools you need to grow into the future.
- What is a direct competitor?
- Why is it important to understand your direct competition?
- What market insights can you gain from your direct competitors?
- How to win new markets from your direct competitors
Why a Basic Understanding of Competition Fails
On a basic level, everyone understands market competition. Businesses of all kinds compete for the attention and purchases of consumers.
That broad simplification is true, but it misses the nuance needed to make the most of your competitor analysis.
While you may not think that matters much, understanding the competition is becoming more complex and important each day.
There’s been a massive uptick in business formation in recent years. According to Pew Research Center, 3 in 10 jobs in the US are now held by the self-employed and their workers.
This means there are more businesses than ever fighting for the same sales. The consumer has an endless array of options.
Businesses need to find the right approach if they want to stand out in that array and win sales.
If you lack a detailed understanding of competitor categories, you can easily adopt practices that harm your chances of success. You might niche incorrectly or create new products that don’t attract the customer base you’re aiming for.
These things often happen when a business doesn’t understand the types of competition they face.
They don’t understand the differences and similarities between them and other businesses, leading to misguided marketing and product innovation.
This in turn leads the market into their competitors’ hands. They have strong branding and marketing that pierces through the sea of confusion and wins the customer over.
Fortunately, there are easy, straightforward ways to categorize competition that allow you to adapt and prosper.
For market purposes, there are two main categories of competition: direct and indirect competitors.
What is a Direct Competitor?
Direct competitors are businesses that aim to solve the same problem as your business, using the same solution.
By definition, direct competitors target the same demographic as you. They also provide the same products or services as you.
For example, if you’re a business that sells light fixtures, your direct competitors would be other businesses selling light fixtures.
The “issue” at hand is darkness. Consumers need their homes illuminated so they can see.
You aim to solve that problem by providing light fixtures. Your competition seeks to solve that problem by providing light fixtures.
You are competing for the same customers by trying to solve their problems with the same products. Thus, you are direct competitors in business.
What is an Indirect Competitor?
By contrast, indirect competitors are competitors that seek to solve the same problem for consumers using a different solution.
Going back to the example mentioned above, an indirect competitor might be a candle retailer.
The problem at hand is still the same. Consumers need a way to bring light into their homes so they can see.
That being, your business is selling light fixtures whereas theirs is selling candles. These solutions aren’t identical.
This matters significantly for a variety of reasons we’ll explore later on. For now, it’s just important to note that indirect competitors share the same market — not the same products or services.
Why Is It Important to Understand Your Competition?
Understanding your competition is the key to growing your business.
Growth, by definition, involves making more profit. To do this, you need to make more sales.
This means you either need your existing customers to buy more, you need to win over new customers, or a combination of both.
None of those are possible without beating your competition.
Many business owners forget this. They focus extensively on their connection with the customer in isolation.
While that connection is a crucial part of running a successful business, it doesn’t happen in a void. That connection is weighed against all the other connections the consumer has or could have with other businesses.
Understanding that context allows you to tailor your approach. You can capitalize on the areas where those connections are weak, positioning yourself as a better fit.
Additionally, understanding your direct competitors vs indirect competitors keeps you from wasting money on ineffective marketing.
Your approach to winning markets from direct competitors often looks far different from winning them from indirect competitors.
If you don’t understand the difference, you won’t know how to create effective marketing campaigns. You’ll focus on the wrong aspect of the customer relationship, and, as a result, fail to capture new sales.
One final reason it’s crucial to understand your direct vs indirect competitors is that they provide valuable market insights.
A recent CNBC article highlights this. Amazon, Home Depot, and Walmart all provided reports on consumer activity.
These reports are relevant not just for those big brands, but for all retailers, as they indicate what consumers are buying and why.
These insights can be used to plan ahead and remain profitable, as other businesses can adjust their offerings and marketing angles to match these trends.
What Market Insights Can You Gain from Direct Competitors?
When it comes to analyzing your direct competitors, one of the most powerful insights you can gain is where your business stands in comparison to the broader market.
This practice, known as benchmarking, serves as a way for you to measure your general success as a business.
While comparison isn’t everything, it’s often more helpful than many small business owners believe. Comparing your business to the businesses selling the same products or services shows you how much potential you have for growth.
If your direct industry competitors are all doing significantly better than you, you know you have the potential to expand significantly.
Their disproportionate success shouldn’t be discouraging. Instead, you should see it as an indicator that there is a big market for what you’re selling, a market you can capture with the right adjustments.
On the other hand, if you’re doing significantly better than your direct competitors, you know your business is successfully catering to the needs of the market.
Consumers are actively choosing you over other businesses selling the same thing. This feedback lets you know you should keep doing what you’re doing.
It also means you might want to consider expanding your business’s offerings. If you’re already doing far better than your direct competitors, you may not have as much growth on the table as you’d like.
You may have tapped the current market, meaning if you want to increase your sales, you might do so by expanding what your business offers.
Direct competitor analysis can also provide insight into the future. As mentioned above, knowing what consumers are buying from competitors gives you insight into their wants and priorities.
These insights are helpful both for your marketing efforts and for future product development.
How to Use Your Competitors to Gain Market Insights
There is no one-size-fits-all answer to analyzing your direct competitors.
A recent Forbes article suggests taking the time to understand your industry as a first step.
Because each industry has its own rate of change and innovation, you need to know how to balance the ROI of analyzing your direct competitors.
Spending too long analyzing competitors when there are no new insights to be gained simply takes away from other things you could do to grow your business.
Once you understand the rate of change for your industry, the next step is to set up your analysis. Start by identifying the direct competitors you will collect data on.
It’s typically a good idea to include businesses of various sizes. This will let you understand consumers in a wider range of categories and will give you a better sense of the market as a whole.
Next, look at the products and services your direct competitors are offering. Your main focus should be on the quality and features.
Also, analyze the way the competition is branding and marketing themselves. How are they positioning themselves to potential customers?
Compare your findings to the success of your competitors. While it may be difficult to find extremely detailed information on other businesses’ profits, you can generally find enough information to indicate if they are growing, maintaining, or failing.
For bigger businesses, you can look at their stock values and often find more detailed reports on their gains and losses.
For smaller businesses, you can gain at least some degree of insight based on the scope of their marketing efforts, how busy their physical locations are, and how many people the organization has.
After you have this information, cross-analyze the success of the business with their products and services, their marketing and branding, and the prices they are charging.
This will tell you what consumers find appealing and what strategies aren’t working. From there, you can adapt your own business to better serve the market.
Can You Use Direct Competitors to Stay Relevant to Consumers?
While expanding into new markets is always a positive in business, customer retention is equally important.
Reaching new customers and making new sales won’t help you grow if you’re losing old customers at the same rate. You need to maintain your current customer base while also drawing in new customers.
Luckily, direct competitors can help you do this as well.
Analyzing your direct competitors gives you direct insight into what your current customers are turning down. This helps you understand what you’re already doing right.
You can then use that information to build on your strengths. This will keep your customers loyal and enthusiastic about your business, even as you reach for new markets.
How to Use Your Competition to Stay Relevant
Using your direct competitors to stay relevant relies on the above-mentioned market insights.
Knowing what your competitors are doing with their branding, production, and pricing, compared to your own business.
Once you have a side-by-side comparison, make note of the most substantial differences. Are your products significantly cheaper? Is your branding specifically targeting a certain type of consumer?
These differences are likely what your existing customer base likes about your brand. To retain them, make sure you keep those features.
This doesn’t mean you can’t add on to your business though. It just means you shouldn’t outright substitute what’s working.
For example, let’s say your business has attracted a lot of its existing customer base by offering very affordable products.
You may want to add a premium product to your lineup. You can absolutely do this without losing your existing market, you just need to do it in addition to the products you already offer.
Can You Win Markets from Direct Competitors?
So far we’ve talked about how to grow using your direct competitors and how to retain your existing customers. But the big question on many business owners’ minds is “can I take over my direct competitor’s market?”
In many cases, the answer is a resounding yes.
While customer loyalty can run deep, the reality is that many customers just want the products or services that best suit them. They aren’t die-hard fans of the businesses they buy from.
Many will happily switch where they buy from if a business has a better price, better product, or better ESG compliance.
This means that all you have to do is make your business more appealing and you’ll win them over.
Thankfully, your direct competitors’ examples can show you precisely how to do this.
How to Win New Markets
Analyze the Competition
As always, the first step is to gather data. You need to know what your competition is doing and who is responding to it.
Gather information on the quality and features of their products and services. This will tell you what their consumers consider important when making a purchasing decision.
From there, look at how the business is branding and marketing itself. How are they positioning themselves to their potential customers?
The intersection between what they’re selling and how they’re selling it is clearly working for their existing customers.
That’s where you come in.
Find The Weakness in Their Strategy
Just because something is working doesn’t mean it can’t be improved upon. What you want to figure out is where your direct competitors’ strategy is vulnerable.
This doesn’t have to be a glaring flaw. It can be as simple as noticing they don’t highlight their sales enough or that you offer the same quality at a slightly lower price.
The key is to find something you can exploit to convince their audience you are a slightly better fit.
It helps to remember that the fanatic fans of a business likely won’t be swayed regardless of the material facts or branding strategy you highlight.
Those customers won’t budge, but they are a small minority in most cases.
Most other customers will happily make a switch if they perceive your business has something better. Since there isn’t a significant emotional attachment, it doesn’t need to be as big as you may think.
You just need to have something that can grab their attention.
Leverage Your Novelty
Finally, once you know what you can use to position yourself as a better fit for the competition’s customer base, use your novelty to pull them in.
Tailor your marketing to highlight how you’re better than the competitor in the domain they care about.
Since this will likely be their first impression of your business, this will create an immediate positive relationship between you and them.
Your novelty means the customer will associate your brand with what is most important to them when making a purchase, setting you up to pull them in and retain them long-term.
Summing Up: Your Direct Competitors
Understanding your competition gives you insight into what consumers want and why they want it.
One of the biggest keys to understanding the market is differentiating between your direct competitors and indirect competitors.
Direct competitors offer the same solution to the same market, whereas indirect competitors offer a different but related solution to the same market.
Further Reading
- Is Staying a Local Small Business Killing Your Profits?
- Eco-friendly Small Business Ideas for the Environmentally-Conscious Entrepreneur
- The Secret to the Attention Economy is Small Business Branding
- The Industry Leader Trap: Should You Ignore the Major Players?
By analyzing your direct competition, you can better retain your existing customer base while also winning over new markets.
Keep the aspects of your business that drew in your existing customers and improve on your competition’s strategy. You’ll maintain brand loyalty while you continue to expand.
One of the best ways to reach new markets is to go virtual. Luckily, there are modern tools that make this easier than ever.
A virtual office from Alliance Virtual Offices gives you everything you need to register your business at a recognized office location while operating entirely online.
Not only does this save you money, but it also lets you reach markets across the world, all from the comfort of your home.
Head over to www.alliancevirtualoffices.com to discover how Alliance Virtual Offices can help you to win new customers while cutting expenses.
