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Start It Up

How do you analyze your competitors?

Matt Whetstone

By Matt Whetstone

Matt Whetstone leads First Bank’s business team. He leverages his lending expertise and understanding of business operations to make great things happen for First Bank clients in Southeastern Illinois and Southwestern Indiana. His team is focused on building relationships, helping clients manage risk and keeping businesses in our communities profitable and thriving.

Once you have established that a market exists for your new product or service, the next step is to analyze your competitors. You’ll do this by identifying similar businesses in your market, evaluating their strengths and weaknesses, and looking for opportunities to exploit their weaknesses or negate their strengths.

The two primary questions you are trying to answer in this section of your business plan are:

  1. What can I do to differentiate my new business from competitors that are already established in the market?
  2. How much market share can I realistically hope to capture if I start my new business?

There will always be competition, both direct and indirect, for the customer’s dollar, so it is vital that you study your competitors prior to starting your new business. The goal is to differentiate your product or service so that the customer will choose you over established competitors.

Identifying your competitors

The first step is to identify your direct competitors. Direct competitors are businesses that sell a product or service that is comparable to your proposed new product. These are the businesses that you will be competing against immediately if you decide to go ahead and start your new business. If you are going to be successful in your new business venture, you are going to have to woo their customers to choose you over their current suppliers. At the very least, you will need to know the following about each of your competitors:

  • What they offer and what they charge
  • What they do well, which you should try and minimize
  • What they don’t do well, which you can solve
  • Where there are gaps that you can take advantage of

Even if you know your intended market reasonably well, be wary of assuming you know who all your direct competitors are. Not every successful business has a large shop frontage or a high market profile, and you’ll need to dig deep if you want to find out how many direct competitors are out there.

  • Search specific categories in online business directories such as Yellow Pages or Universal Business Directory (UBD).
  • Walk around the area where you intend to locate your business.
  • Ask people if they know of any similar businesses.
  • Read trade, industry and general business publications.
  • Review business and industry websites.

Once you know who they are, researching your direct competitors might be easier than you think. All businesses (even those that take a low-key approach) are in the business of self-promotion—it’s how they attract customers—so there’s usually plenty of freely available information about them and their products and services.

The following are possible sources of information about your competitors:

  • Review their websites and subscribe to their online newsletters.
  • Perform a web search for the business name and the names of important employees.
  • Read their annual reports and marketing material.
  • Attend trade shows where competitors exhibit.
  • If possible, visit their premises and buy something.

Once you have accumulated as much information on your competition as you can, it’s time to group them for a deeper understanding of the market. There are two primary ways to group your competitors:

  1. Look at the market from the customer's viewpoint and group all your competitors by the degree to which they contend for the buyer's dollar (size and marketing effort).
  2. Group your competitors by their marketing strategy. This will help you figure out their approach to business and how you can compete more effectively.

Creating competitive advantage

Once you know what competitors offer, you can compare your similarities and differences to identify your points of difference and then develop these into a compelling competitive advantage. Many consumers avoid change, continuing with what’s familiar instead of taking a chance on the new option. Answer these two questions to brainstorm strategic ideas for wooing customers away from your competition.

  • What precisely is your competitive advantage or unique selling proposition (USP)?
  • How do you plan to communicate your USP to your customers?

These are two of the key questions lenders and investors are likely to ask you. What makes your business different?

If you’re concerned about taking on larger or well-established businesses, remember that being a small business can be a distinct advantage in itself. You’re often better placed to:

  • Deliver swift decisions to respond nimbly to customer feedback.
  • Offer guaranteed personal contact.
  • Provide flexible opening hours or accessible after-sales service and support.

These seemingly simple differences can actually make a significant difference to the customer.

Here’s a list of potential angles for enticing customers over to your business:

  • Faster at delivery.
  • More convenient.
  • Cheaper.
  • More diversified.
  • Product exclusive.
  • Located in a better place.
  • Focused on after-sales service.
  • More experienced.

Know exactly why you are better than the competition and make sure you promote these attributes

Your strengths can give you a competitive advantage. For example, you might have excellent product or technical knowledge, or be very well networked and respected in your intended industry sector.

Look for ways to minimize your weaknesses. For example, you might be competing against a business with several locations nationwide. But could you expand the market reach of your single location through a website? If your competitor has greater purchasing power (getting products more cheaply), can you form an alliance with similar businesses in different towns or regions to gain more buying leverage?

Reducing the effect of competitors

Try to anticipate how your competitors will react to you encroaching on their territory once you start operating. Don’t be surprised if they try to push you out of the market before you’re even established.

Ask yourself:

  • What tactics are your major competitors likely to employ when you begin competing for their market share, and what is your return action?
  • How would you cope with a discount battle if your competitors are larger businesses with more cash reserves?

Both change and competition are facts of life in the marketplace. However, small businesses can band together with physical proximity or promotions such as seasonal shopping days. A retail store can benefit from being next to a restaurant and vice versa, each contributing to the area’s overall foot traffic. In other cases, proximity can damage prospects. Imagine what would happen to your business if someone set up shop alongside you. Would this boost or damage your trade?

Create barriers against competitors

To be sustainable long term, you must be able to defend your business and reduce the effects of competitors encroaching on your market. If your business flourishes, what’s to stop other people copying your idea? Copycats can significantly damage the viability of your business, so use some straightforward and relatively inexpensive ways to protect your business even before you start trading.

Try to create barriers against your competitors that will make it harder for them to compete. For example, could you secure an exclusive operating license or an exclusive deal or distributorship?

  • Exclusive operating license. Imagine you’re planning to operate a jet boat tourist attraction and have managed to secure a commercial license to operate on the river. No one else is running a similar attraction at this stage, but if yours turns out to be successful, they might. Can you ensure your license is exclusive or that only a limited few will be issued?
  • Exclusive deal or distributorship. Look for a supplier who will sign an exclusive contract with your business. This will prevent competitors from accessing your products.

Protect your brand

Unless you’ve invented something, you may not think you have any intellectual property (IP) to protect. However, even your business name and logo have potential value as they might be the very thing that gets you recognized in the marketplace.

Your business name and logo become a brand in the marketplace from the day you start business. Take steps to protect them. Before you design your logo, stationery and signage, check that no one else is using your trading name. Can you imagine discovering after you’ve got all your stationery printed that there’s already an established business with the same or a confusingly similar name? How much would it cost to re-design and re-print everything?

These steps will help you to protect your business name before you start your new business.

  1. If you intend to form a company, reserve your chosen name through the Secretary of State office in your state. To be cautious, check with the Secretary of State for Delaware also. Many companies incorporate in Delaware because of its friendly business laws. Once you form a company, future competitors will be unable to register a business name that is identical or almost identical to an existing (or previously reserved) one, i.e. yours.
  2. If you intend to start as a sole trader or partnership, check both online and printed directories to ensure that no similar trading name exists. Also enter the name in search engines such as Google or Yahoo to see what comes up.
  3. Secure your web domain name. Once you’ve registered your web domain name it can’t be used by anyone else.

Protect your ideas

If you have a totally new product or service, being ‘first to market’ may give you an initial advantage, but if it’s profitable, it’s quite likely that others will eventually try to adapt or copy your idea.

Depending on the level of commercial sensitivity surrounding your product or service, it may pay to talk to a specialist IP lawyer. This is particularly important if you plan to run sample tests in the market, and while this may seem an unnecessary expense at the moment, failing to protect your idea could be a lot more costly in the long term.

  • Patents - Owning a patent for an invention or new manufacturing process can exclude anyone else from commercializing that idea for a period of 20 years.
  • Copyright - Copyrighting written material is a quick and easy way to gain a level of protection for any original creative work. You can register your copyright or trademark with the US Copyright Office at copyright.gov. To indicate that your material is copyright protected, simply including the symbol © together with your business name and date gives you a certain level of protection.

As with any legal protection, it can pay to talk to a specialist lawyer.

Maintain your focus on the customer

Another way to create barriers for your competitors is to avoid being distracted by what they do. After all, you’re going into business to do business with your customers, not your competitors. Aim to maintain your customer focus and provide excellent service.

  • Ensure that you have enough staff to provide satisfactory customer service consistently and build good customer relationships.
  • Focus on promoting one or two key competitive advantages. Too many can confuse customers.
  • Ensure consistent standards by implementing processes and changing them as needed.
  • Empower staff to resolve most customer service issues without delay.
  • Resist the temptation of a price war with your competitors. Concentrate instead on adding value to what you offer.

Position your brand consistently

Aim to get your positioning right from the start. Even though you might know where you want to position yourself in relation to other businesses in the marketplace, the consumer will ultimately decide where they think you fit. Still, your position isn’t entirely out of your control. Exert as much influence as you can.

If you’re aiming for the high-quality end of the market, but you present an image that’s inconsistent with this, it will be hard to persuade people differently once they’ve made up their minds.

If it’s not feasible for you to position yourself where you need to be, such as a higher tier in the market, you might want to stop and revise your idea or put it on hold until you can find additional funding.

Four ways to position your small business

  1. People – level of expertise or depth of knowledge.
  2. Product – range, price, service.
  3. Location – ease of access, prompt delivery.
  4. Image – user friendly, upmarket, leading edge.

Take the next step!

You have completed your analysis of competitors, learned how to differentiate yourself from established businesses, and explored ways to protect your business from competition. Congratulations! You are now in a better position to gauge the market share you can reasonably expect to acquire.

The next step in developing your business plan is to determine the start-up cost for your new business. Read our next article in this series: "How do you project your start-up costs?"

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