Starting a Small Business? First Understand Your Competition

Can you imagine a world in which your business has no competition? Neither can I, yet I have reviewed more business plans than I care to admit in which entrepreneurs boldly declare those four words:  “I have no competition.”

To get a clearer understanding of your competition, it is helpful to know that there are three types:  Direct, Indirect and Non-consumption.

  • Direct competition is what comes to mind for most of us. These are the competitors that do the same thing as your business in the same way.
  • Indirect competition fulfills the same need, but in a different way. The consumer only has to have their need satisfied by one competitor or the other.
  • Non-consumption competition is what most of us think about the least and is probably the hardest to quantify, but represents the number of people who fit the profile of consumers in your target market, but still choose not to buy your product from you or your competitors.

The practical example I use most with my small business clients is that of family entertainment. My family has a set budget every week for entertainment. I have lots of options to have that need met.

  • If we decide we want to go bowling and there are two bowling establishments close to our home, those two businesses are in direct competition for our spending. The need I have identified is bowling. The money in my family’s budget in earmarked for it so now we need to choose which of the alleys we want to go to. We are going to choose based on price and features.
  • When the money in our household was budgeted, bowling wasn’t the identified need, family entertainment was. So that budget represented opportunity for all different kinds of family entertainment venues. Suddenly the bowling alleys, movie theatres, mini putt parks and climbing gyms were all in indirect competition. If we go to mini putt this week, the opportunity is gone for the bowling alley to win my business.
  • We could decide that while the money was intended for family entertainment, we would rather put this week’s allowance in the bank for a future family vacation or a new big screen television for the living room. Or, if money is tight, we might reallocate the funds. My family may have represented a qualified buyer in the identified target market of these entertainment venues, but I’m still not spending my money on them.  This is an example of non-consumption.

Assessing your competition is an important part of your market research and business planning. Look at what your competition is doing well – you might be able to learn from them. Look at what your competition is doing poorly – this might be something for you to avoid. Find out where there is a place for you to position your business among your competition – then set your business up for success.

For more information, check out our Steps to Success seminar series, including Market Research and Business Plan Basics.

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