If you’re starting your own business, you need to know your competition. But rather than viewing your competitors solely as enemies, why not think about what you can learn from them? What are they doing right that you can emulate? Where are they underperforming and how can you use that to your advantage?
As part of our Entrepreneurship WebSeries, Stephani Robson, a senior lecturer at Cornell, joined eCornell’s Chris Wofford to talk through the process of analyzing your competitors. What follows is an abridged version of her webinar presentation.
Robson: Let’s start off discussing the idea of competition. A lot of people see competition as a bad thing. They think of it as somebody to be beaten, someone to be defeated. That’s actually a mistake, because your competitors are probably your best source of information about what your business should and should not be.
There’s a great quote that I like from Otto von Bismarck: “Only a fool learns from his own mistakes, a wise man from the mistakes of others.” That should be your major takeaway from today: competitors are a great source of learning. Think of your competition as someone you’re trying to absorb as much as you can from.
With that in mind, let’s talk about how to figure out who your competition is. A lot of people think competition has to be a company doing the exact same thing — but competition can come from many different angles. It really depends on what you’re trying to sell and what other entities out there are trying to do something similar.
Wofford: But how do you know which ones you’ll really be competing with?
Robson: There’s a method for identifying your competitors that we call “the three Ps.” The first one is “product.” What is it that you intend to sell? The second P is “price” — and by that I don’t mean a specific number, but a price range or a segment. And finally, the third P is “proximity”, which is how close that other business is to yours. Perhaps not physically close, because if you’re not doing a bricks and mortar business it’s not all that important, but certainly how close you are in terms of your mindset.
I typically break down competitive analysis into three parts: macro, vicinity and unit. In the first category, macro, you have competitors that may not be competing with you directly but you can still learn something from them. Next, vicinity, is simply whether there are businesses in your area, whether it’s a physical area or a virtual one, that are going after a similar customer base even if they aren’t necessarily competing with you directly. The last part, unit, involves looking very carefully at specific organizations that are direct competitors to you.
Wofford: It would be great to hear you expand on this.
Robson: Sure. As I mentioned, macro is referring to businesses anywhere that are going after a similar customer experience to what you plan to offer. As an example, let’s take a lemonade stand. If I were going to start my own lemonade business, I would want to look at businesses all over the place that were trying to offer the same kind of experience. That is, not just others selling lemonade, but it could be iced tea or ice cream or basically anything else that is a single serve refreshment that you could walk around with.
First I’d look to see what their product is. What are they selling? What’s the range of items they sell? How are those items packaged? How are they presented to the customer? What’s their price structure – do they have a range of prices or do they offer just one item at one price point?
As you know, people don’t purchase a product just because of a price – they’re looking at the whole value proposition. So when you look at a competitor – whether it’s something directly competing with you or something out there in the world that you think you can learn from – ask, “What’s the value they’re bringing to their customer?”
If I am starting a lemonade stand, I’m going to look at Starbucks and ask what value Starbucks brings to its customers. Very quickly, you’ll see that it’s not just about a cup of coffee. Part of the value proposition for Starbucks is that it’s a brand identity that people feel they can connect to. It’s also products that relate to the consumption of coffee that you may not necessarily think of. For example, Starbucks was one of the top sellers of music for a long time. So, what’s that whole package? What’s the value proposition and how did they do it?
Looking to see what competitors are doing in terms of how they execute is really one of the areas where an entrepreneur should spend a lot of time, even before they’ve really figured out their business. How you execute really makes the difference — it’s not so much about the product.
Wofford: Even a great product can’t save poor execution.
Robson: Are you familiar with the term “servicescape”?
Wofford: No, I can’t say that I am. What’s a “servicescape” all about?
Robson: Servicescape is essentially the environment in which the service takes place. It’s not just the room. It’s the lighting, the seats, the packaging, the branding. It’s the music and the smell. All of that is servicescape and a lot of very successful brands really use it effectively. You can learn a lot from competitors’ servicescapes about how to compete effectively and the things that are connecting with your customer base.
Wofford: I had a good servicescape experience with a lemonade stand. There are some kids in our village, maybe 10 years old, who did the fresh-squeezed thing in a little play area in the center of town. They made a boatload of money and I think that squeezing it fresh is what did it. You saw it being made right in front of you. That was their competitive advantage, right?
Robson: Precisely. For a kid to do that at a lemonade stand is just brilliant.
Wofford: What else should we consider when looking at how competitors provide service?
Robson: When you’re looking at a competitor’s servicespace, you also want to consider their position in the marketplace. Are they market leaders? How quickly are they growing?
Wofford: How do you access that information? How do you find another business’s growth plan?
Robson: Well, it comes from doing some detective work and some judicious Googling. For example, let’s take a business in the lodging sector. There is a company called citizenM, which is a small Dutch hotel company that is growing very rapidly. They have 6 hotels now and the plan is to open 9 in the next year, and 12 in the following year. I found that out by going to their website and digging up a press release.
You can usually find a lot online. A Google News search is often helpful. You can also read up on reviews to learn about the buzz surrounding the business. What are consumers saying about it in online reviews?
The things you really want to get at when you’re looking at these other businesses is how they are emotionally engaging the customer. We all know that in order to be successful in business, it’s really not about what you are selling. It’s about how you make a connection with the person who is buying it. Is it through the fresh-squeezed lemon right in front of the guest, or is it through the servicescape or is it through great social media use? There are always going to be strengths and weaknesses when you’re looking at competition and there are always going to be gaps in the market.
My background is in restaurants so I do a lot of work with restaurateurs and we talk about this idea of gap analysis. That is, a way of figuring out if there is room in the marketplace for your particular concept. So for restaurants, it could be asking if there is room for an old-fashioned meatloaf restaurant, for example.
Wofford: I don’t think there is.
Robson: Probably not, but with gap analysis, you can look at pricing and the quality of concepts that are similar to or adjacent to the concept you’re thinking about developing. You rank them on the two dimensions of price and quality and look for gaps. When you find the gap in that ranking, ask yourself why the gap is there. That will tell you something about whether your business idea is viable or not. There might be a very viable reason for a gap. Maybe there is simply no way to deliver the right experience at that particular price point.
Wofford: I’d like to turn to an audience question now if that’s okay. It’s from Caitlin, who asks: “This is all a little overwhelming. Do you have any advice on how to keep your head above water when getting started? ”
Robson: That’s an excellent question, because I’m throwing a lot of things out there for you to do. The best place to begin is to identify four or five businesses that you admire. They don’t have to necessarily be in your particular discipline, just organizations that you admire and want to learn something from. Then use this competitive analysis approach that we’re talking about to look carefully at those businesses. Once you’ve done that, you sort of get used to the process and if you want to expand it, you can then look at other businesses that are closer to what you are doing. What you want to try and take away is what they are doing right and how you can apply it to your business.
It’s important to recognize that sometimes your successful competitors may have advantages that are really hard for an entrepreneur to compete with. They may have a parent company with deep pockets, for example. To use the restaurant industry as an example again, a lot of people look at Chipotle and think, “I want to be just like them.” Well, guess what? Chipotle was bankrolled by McDonald’s so it’s hard to compete with that kind of money.
But at the same time, there are things that you can look at that might be weaknesses in those organizations. Is their execution reliable? Are they so limited in their offerings that they may be at risk as tastes change? Look for expensive operations that are doing an amazing job and try to come up with a way of doing things less expensively.
Another thing I want to touch on is ubiquity. There is an interesting phenomenon that when a business starts to grow so much that it is everywhere, there starts to be a bit of a backlash against it.
Wofford: This is like the Starbucks effect, right? There are so many Starbucks that people start saying, “I want the anti-Starbucks.” Or someone might want to start their own coffee business that is the anti-Starbucks just because they know they cannot compete with them head-to-head.
Robson: Right. I talked earlier about the concept of macro, which is looking at companies anywhere that are delivering a similar customer experience to what you are shooting for. If you are thinking of something bricks and mortar, then obviously it would be in the physical area that you are thinking of building or renting. If you are looking at a digital business, it could be businesses that are going to be offered in the same venue, like Apple’s App Store, for instance.
What you are looking for is who is there now and who is coming into the market, which can be tricky depending on what kind of business it is. You can also look to see who has failed in this marketplace and why they failed.
It’s also very helpful to look at online reviews. Look at the number of stars and look at the trend. Is there a lot of variation or is it pretty consistent? Look at the number of ratings and who is making the ratings. One of the nice things about these review websites is they tell you something about who the rater is. We know their age, where they are located, how many reviews they have written. I like to look at that very closely to see if the person doing the review is actually the kind of customer that we are going after.
A lot of entrepreneurs make the mistake of thinking that everybody is their customer. That is probably not going to be the most effective strategy. You need to nail down who your customer is and then the reviews from people who fit that profile are going to be much more interesting to you. If the type of customer you’ve identified is giving your competitor 4 and 5 stars, you know that business is probably doing very well at connecting with your customer.
Wofford: I have always found that written reviews are very good for understanding the kinds of expectations people have. Poor reviews are almost invariably the result of the customer not getting what they expected. On the other hand, a lot of good reviews talk about how their expectations were exceeded.
Robson: Exactly — and it’s also important to remember that you need to be careful with reviews because the two situations you’ve just described are usually what motivates someone to write a review to begin with. So I’m a little cautious about doing too much of a deep dive into the text and instead focus on the average rating.
Wofford: Right. People do not write reviews just to say, “It was okay.”
Robson: I’d like to wrap up by saying that you need to cast a wide net to learn as much as you can. You need to test your ideas. You need to be flexible. You need to be nimble. Those four things together are what describe most successful entrepreneurs.
Wofford: Stephani, thanks so much for joining us today. You really gave some great advice.
Robson: Thank you, I hope the viewers can use it.
Want to hear more? This interview is based on Stephani Robson’s live eCornell WebSeries event, Entrepreneurship: How to Learn from Your Competition. Subscribe now to gain access to a recording of this event and other Entrepreneurship topics.
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