Keep your friends close and your enemies closer. OK, your competition isn't necessarily the enemy unless you're trying to be dramatic, but having a successful business is all about rising above the competition. In truth, most new businesses fail because there isn't a market need and because they're outcompeted. This outcome can be avoided by taking a deep look at the competition with a competitor analysis.
A competitor analysis, also known as a competitive analysis, will help you discover how your business can best serve your target audience through the lens of your competitors' successes and failures. What makes your business stand out in the market? Where can you improve? A quick competitive analysis can help you optimize every aspect of your business strategy.
What Is a Competitive Analysis?
You may believe that your business has the best product around, but you’ll never know if you’re truly serving your target audience as effectively as you can if you don’t take a look at your competitors. What are they doing, why is it working and how can you improve on it? A competitor analysis answers these very questions and helps you design a more strategic, effective business plan and marketing strategy.
In layman’s terms, a competitive analysis helps businesses learn how the competition works by examining things like product roll-outs, social media, pricing, sales numbers, website text, marketing strategies and customer service. It can be as overarching or as pinpointed as you want, but the main goal is to identify competitors' strengths and weaknesses in order to better inform your own business strategies. You can only stay one step ahead of the competition if you know what they're actually doing.
The Benefits of a Competitive Analysis
Roughly 19% of failed startups failed because they were outcompeted. This could easily happen to any business if it is not paying attention to what’s going on around it. In the most basic form, we see this with pricing strategy. Why would a consumer pay a higher price for the exact same product offered by another company?
If a company doesn’t run a competitive analysis, it might never realize that its business isn’t offering the value customers need, which is actually a relatively common issue. About 18% of failed business owners claim that pricing and cost issues are what made them go under. Beyond that, a competitive analysis can help you:
- Identify gaps in the market: Is there a hole in a target or secondary market that your competitors cannot fill?
- Create new products and services: What is your competition offering that you are not?
- Uncover industry trends: Are you products and services behind or ahead of the market curve?
- Develop a more effective marketing strategy: How are your competitors effectively reaching the market, and how can you utilize their strategies for your benefit?
- Shape your pricing: You don’t want to charge too little or too much.
You set yourself up to succeed once you truly understand what makes your company better or more unique than what you're up against in the same market.
Competitor Analysis in Business Plans
A competitive analysis isn’t just something businesses do to optimize their own practices and help them develop new competitive strategies. It should be included in a comprehensive business plan. This business plan section analyzes both current competition and potential competition as your company grows and possibly expands into different markets. It also analyzes potential competitors who aren’t currently in your market but may eventually become direct competitors.
Key Parts of a Competitive Analysis
Competitive analysis varies depending on the type of business and what the business is trying to learn. For example, a business gearing up for a product launch may want to examine similar products from its closest competitors. Alternatively, a company may run a competitive analysis on its competitors' marketing strategies to develop a more effective social-media strategy or better search-engine optimization. It can even be as simple as finding out which influencers are working with which brands in your market.
Though you may wish to narrow down your competitive analysis to the bare bones later on, you should start with a comprehensive, high-level analysis for your business plan. It should answer the questions:
- Who is the target market?
- How much of the market share does this business own?
- What makes this business unique compared to like-minded businesses?
- What are the prices of its products?
- How is it funded?
- What information does it highlight in its marketing and sales material?
More Components of a Competitive Analysis
In the e-commerce space, you may also want to take a close look at competitors' shipping policies, as that can be why a customer chooses to do business with one company over another. Marketing strategies should be a major focus overall.
In addition to examining the overall business model of your competitors, you may want to dive into:
- Competitor website: What features, like live customer-service chat and search tools, does its website include?
- Customer experience: How does a competitor’s website and social-media strategy add to the customer-service experience? Does it have a complicated user interface? Is it optimized for mobile use?
- Overall marketing strategy: Is it focused on traditional print ads or social media? Where does the largest chunk of its marketing budget probably go?
- Social-media strategy: Is this company using influencers? Does it have hashtag-based marketing strategies? How does it interact with consumers and potential customers online?
- Content marketing: Does it have sponsored blogs? Is it creating video tutorials? What kind of content is this company creating, and how does it serve the target market?
- Email marketing: How often does it send newsletters? Are there promo codes? What is this company offering to email subscribers?
It’s also important to take a look at customer reviews, especially if you’re comparing similar products. This can help you improve on your competitors’ weaknesses and understand what consumers are seeking in your market.
Start by Identifying Your Competitors
You can’t run a competitive analysis if you don’t know your competitors. You should start by creating a list of competitors. It should be a mix of seven to 10 businesses that sell similar products, have a similar business model, market to both similar demographics and slightly different demographics (you never know who could be a potential customer) and are new and established within the marketplace.
Diversity is key, and you’ll want to split up your competitors into three categories — primary competitors, secondary competitors and tertiary competitors — to determine how much they relate to your actual business. The most important are primary competitors: the companies with whom you’re directly competing. For example, if you’re a local vegan cafe in New York City, your primary competitors are other vegan cafes in New York City.
Next come secondary competitors, which are companies that indirectly compete with your business by offering similar products to a different target audience. For example, if you’re a New York City vegan cafe, a local brunch spot with some vegan options would be your secondary competition because it offers some of the same foods, but its target market is omnivore brunch-goers.
After that are tertiary competitors, which are companies that don’t sell the same products but have similar audiences. These companies can partner with your direct and secondary competitors in the future. For example, a tertiary competitor of a New York City vegan cafe that targets urban millennials may be a meal-delivery service that targets urban millennials but does not yet offer a vegan menu. In the future, it could potentially partner with a vegan cafe to curate a vegan menu.
Collect Your Data
You’ll probably want to create a spreadsheet to organize your data. Include categories under each competitor like price range, product line, social media engagement, lead-generating content, offers and promos and anything else you think may be useful for your business to analyze.
After that, you’re going to have to conduct your market research. You can invest in tools like Ahrefs and SEMrush to monitor your competition over a period of time, or you can simply collect the data on your own. There are services like Buzzsumo, which analyzes top-performing content from competitors; Alexa, which helps you view target audience demographics and backlinks; and Facebook Audience Insights, which can help pull social-networking data from established competitors.
You’ll also have to do your own hands-on research, which you can do yourself or by hiring a secret shopper — someone who is paid to pose as an actual consumer and gathers a variety of information about products, services and quality. If you want to conduct this sort of market research on your own, subscribe to competitors’ blogs and press releases, follow them on social media and even purchase products or use their services to understand the customer experience.
Perform a SWOT Analysis
Once you have a wealth of data, it’s time to perform a SWOT analysis, which will help you find out where your business stands among your competition. You’ll want to ask a series of questions to help you accurately analyze four major categories: strengths, weaknesses, opportunities and threats. Strengths and weaknesses are self-explanatory since every business has things that put them ahead of the competition and things upon which they could improve.
Opportunities and threats are more about how a company relates to the world versus just the market. The former can give a company a competitive advantage (for example, a particularly snowy forecast for a snow-plowing service). The latter consists of things that may hurt a business (for example, a drought leading to a poor avocado harvest will hurt a company that sells artisanal guacamole).
When conducting your SWOT analysis, you’ll want to ask yourself:
- Where is my competitor succeeding?
- What are its weakest areas?
- Where does it have an advantage over my business?
- Where do I have an advantage?
- Are there opportunities my competitor has not yet utilized?
This back and forth will help you understand exactly where your brand fits in the target market. You can then use this to improve your competitive strategy and better serve your demographic.
Common Mistakes to Avoid
A competitive analysis is only as effective as you make it. Findings are great, but they won’t actually help your business unless you take action and actually use your data to create new and more-effective strategies. It’s important to remember that the competition is always evolving, so this is not a one-time deal. You’re going to have to update your insights regularly to keep your competitive advantage.
Remember that we all have our own biases, and sometimes, a company succeeds because of luck of the draw. You must account for good timing when analyzing your results and try to look at things objectively. Let them guide you, not your opinion.
- Inc: How to Write a Great Business Plan: Competitive Analysis
- Shopify: How to Conduct a Competitive Analysis for Your Business (Plus a Free Template)
- HubSpot: What's a Competitive Analysis & How Do You Conduct One?
- CBInsights: The Top 20 Reasons Startups Fail
- Investopedia: Strength, Weakness, Opportunity, and Threat (SWOT) Analysis