Whether you’re preparing to launch or planning an expansion, a competitive analysis is essential to grow your small business. A thoughtful and thorough analysis will help you compare your business to others in your industry – whether you’re competing within a local landscape, or have a wider scope through ecommerce.
In this how-to guide, you’ll learn the basic components of an effective competitive analysis. Creating and updating yours will help you spot opportunities and attract target customers, while avoiding expensive mistakes.
Why your business needs an effective competitive analysis
Simply put, nearly all small businesses have competitors (with the exception of rare first-to-market products or patented intellectual property).
To be successful, you should understand what your competitors sell or provide, how they price it, and how they attract target customers and excellent employees. It’s important to identify and leverage what you offer that’s different from others within your industry. This could be an unexpected level of service, a higher quality product, better pricing, or simply items in the same field that are somehow tweaked to improve them.
On the other hand, if you don’t know what sets your business apart, you could miss out on potentially profitable opportunities and put your business at a significant disadvantage – especially from competitors who are creating and using their own competitive analyses.
Let’s say that your business is a pizzeria. As you’re scoping out potential locations, using your competitive analysis, you learn that your first choice location is oversaturated with pizzerias. Then, you spot an area where pizzeria competition is low. That essential information can help you make better decisions from the start and avoid mistakes, like signing a long-term lease in the wrong area.
However, it’s important that you don’t mistake a less competitive area for having no competitors – there are still other restaurants and takeout food options that you’ll compete against. You should also keep in mind that your business’s success can inspire others to open similar businesses, so even if your competition is relatively low, it likely won’t be for long.
On the other hand, if your business is a retail boutique, you’ll want to be in a location that’s filled with other shops, as foot traffic is key to your success. In this case, having other retailers around is a benefit and your competitive analysis can help you spot unmet demand or clarify your price-point potential. Then, you can determine how your business can gain competitive advantages and attract customers from the other shops.
If your goods or services have unlimited potential to attract customers through ecommerce, even though your customer base is much larger, you’ll also have more competitors. That gives you just as much reason to do an effective competitive analysis.
How to develop an effective competitive analysis
Thanks to the internet, there’s loads of information and data that’s publicly available about your competitors and target customers. By conducting some basic research, as well as networking with others in your industry, you can collect sufficient information for a solid competitive analysis. Once you have an analysis in place, it only takes a couple of hours a month to update it to keep it effective.
As you update your competitive analysis regularly, you can spot opportunities that you might otherwise miss. For example, a new or in-demand product or service that supports your key offerings, or indications that a competitor is struggling – can present an opportunity to acquire them and build your business further.
Here are the steps you should take to create and update your analysis:
Step 1: Refer to your business plan to find/define/update:
- Your primary products or services: These form the basis of your competitive analysis, because you’ll be looking at similar businesses within your target sales area (whether that’s local or online).
- Your target customers: You want to ensure that they’re within reach geographically and financially, and that there’s enough population base to support your success. For example, if there are no other day-spas in an area, it could show a great opportunity or it could be because there isn’t a customer base to support that type of business in the area.
- Your company’s culture: It’s a common mistake for business owners to think of competition only in terms of products and services. You’re also competing for great staff and brand loyalty. For many small businesses, less tangible aspects like company culture, employee satisfaction, and community contributions are often what will set you apart from competitors.
Step 2: Use the internet to start your research
The SBA’s market research and competitive analysis guide includes many valuable resources and is a great place to start. Another resource is your local Chamber of Commerce. You can work with them to identify existing businesses within your sales area that have similar offerings. While it may not be a good use of your time to investigate all of them, choose those that are most similar to your business – those with the goods and services that you offer, that are in your area, and that attract your target customers and price points.
Step 3: Determine what sets your business apart from your competitors
How is what you offer different from what already exists? These differences become your competitive advantages and knowing these helps you focus your resources and set accurate and profitable price points. Look for any and all differentiators: Price, service, quality, hours of operations, environmental impact or sustainability measures, corporate culture, and other differences can make a big impact.
Step 4: Use publicly available information to determine your standing in the market compared to large competitors
This exercise can be both a useful and fun way to gauge how your business stacks up, even when compared to large-scale and leading competitors. It can help you identify areas to strengthen efficiencies or leverage market opportunities to further boost your profitability. Here’s an example of how to do it:
- Let’s say that your business is a coffee shop. If there’s a Starbucks in your area, that’s clearly a well-known competitor and a publicly traded company. That means there’s a lot of information available to you, such as quarterly and annual financial reports, which you can find on the company’s website.
- Find the gross and operating margins (or calculate them) from the profit-and-loss statement, cash (or near-cash), and liabilities stated on the balance sheet. Then, if you haven’t already, run or calculate yours. This will show you how efficient you are in generating revenue compared to an industry leader, while the operating margin will give you the ability to compare bottom-line profitability between your business and theirs.
- Compare cash reserves and liabilities to gain an understanding of your cash ratio compared to theirs. As a result, you can determine if and when you need to build up your reserves, such as obtaining a working-capital loan.
- You can also listen in on their public-earnings calls to hear about their challenges and future plans. Although you have a small coffee shop compared to theirs and may not have the same cash or human resources, you can be far more responsive to those challenges and opportunities and can benefit from their market research without spending your own resources.
Step 5: Take advantage of free local resources tailored to small businesses
Your local Small Business Development Center (SBDC) or SCORE office can offer a wealth of insight and competitive research. In addition, the SBDCNet is a clearinghouse of information that can give you business snapshots, industry links, and other research to benefit your analysis.
Step 6: Consider which differentiators can be leveraged to develop your customer base while also building loyalty and profitability
For example, your small retail shop may not be able to compete with big-box stores on pricing or quantity of offerings, but you can grow average sales and customer loyalty by leveraging personalized service and special orders.
Step 7: Select a few similar businesses and follow them
Check in on your competitors via social media and, if they’re local, stop by. Join their email lists, too. Soon, you’ll identify opportunities and challenges, as well as additional differentiators that can strengthen your business. Keep in mind, there’s also a lot to be gained by forming relationships with your competitors, such as sharing information on changing local economies, availability of great employees, and more. That’s why restaurateurs eat in other restaurants and why shop owners visit (and buy from) other shops. Friendly competition can be good for everyone.
Step 8: Review your competitive analysis quarterly, so that you can best apply your marketing and other resources
Once you’ve gathered your competitive market data, integrate it into your marketing plan and define your unique value proposition (UVP). This information will guide your marketing and related resources, and help you promote your business’s distinguishing characteristics. It will help define and support your brand position as well as allow current and potential customers to gain a better understanding of how they benefit by doing business with you, which builds longer-term loyalty.
Note: Following your analysis, if you find that your only differentiator is lower prices, your business could wind up in a difficult position, as competitors will likely act on that by lowering their prices. In this case, it’s worthwhile to work with small-business support organizations, like SBDCs and SCORE, or marketing professionals who can help you rework your business plans and develop other, more sustainable competitive advantages and/or increase your prices in ways that support your profitability.
Step 9: Refine your marketing tactics to leverage your UVP
While common tactics, such as using social media to promote your business and brand, can be valuable, they’re also being used by many of your competitors. If your competitors are particularly well-resourced or well-established on social media, it can be hard for your business to break through.
Instead, incorporate those sources, but also try to come up with creative and different ways to market your business. Over time, you’ll be able to gauge the effectiveness of your marketing tactics to attract new customers, retain existing clients, and support your brand’s UVP. That insight will allow you to refine your products and services to optimize results and profitability.
Remember: A competitive analysis is a necessary tool to use and update regularly
Customers have many options for goods and services today. Even for hyper-local small businesses, it’s easier than ever for customers to learn about and visit other businesses due to internet searches, word-of-mouth recommendations, and social media.
The more you know about your competitors, the better you can attract and satisfy your customers. Through competitive analysis you’ll learn about what they want, but also what they’re missing from your competitors. You’ll also be able to identify add-ons to goods and services that are otherwise lacking or unavailable and this information can boost your business’s bottom line.
If you learn that you have no viable competition, then either it’s best to be ready for it because there will be copycats, or you need to do further analysis to determine the demand for your offerings, because you may have overestimated the market interest. A thorough competitive analysis, isn’t just a great tool to identify market opportunities – it can save you from investing precious time and financial resources in a business that may be off-base in terms of consumer demand.
Although it takes some time to develop your initial competitive analysis, once you’ve got yours in hand, updating it only takes an hour or two each month while making the most of your time and resources you invest into goods, services, and reaching your target customers.
Pursuit has financing options that support small business success
If you need funding to support and further differentiate your UVP, Pursuit can help. We have over 15 small business loans and a line of credit available that can fit a variety of needs and uses. Check out our loan options, then contact us to learn more.
