Speaking the language of competition

Your sales figures provide your first indication of how you’re doing in your competitive arena. If they’re strong and growing, your business is on the right track. If they’re sliding downhill, you have your work cut out for you. This section defines the terms to know in order to evaluate and improve your position in the competitive field.

Knowing what you’re up against

Your business faces three kinds of competition:

• Direct competitors that eat into your market share: They offer the same kinds of products or services that you do and appeal to customers in the same markets that you do business.

  Your market share increases when you lure business from direct competitors to your business.

• Indirect competitors that erode your share of customer: For instance, if you sell paint but your customer buys a paintbrush somewhere else, that paintbrush seller is an indirect competitor because it’s capturing your customer’s secondary sale. Similarly, if you own a marketing company and your client also uses a sales coach to build business, the sales coach is your indirect competitor.

  To increase your share of customer, find a way to serve as a one-stop solution by offering your primary product and also the secondary, complementary, or add-on products that customers currently obtain elsewhere.

• Phantom competitors that block your share of opportunity: One of the biggest obstacles to a purchase — and therefore the biggest phantom competition — is your customer’s inclination to buy nothing or to find some alternative or do-it-yourself solution instead of buying what you’re selling. Taking the paint store example a step further, if you offer a choice between enamel and latex paint but your customers opt for vinyl siding (which never needs paint), a siding outlet is a phantom competitor capable of blocking your business. For that matter, if customers decide that their houses can go another year without a paint job, the option to do nothing is your phantom competitor.

  To increase your share of opportunity, discover your phantom competitors and then make your product an easier, more satisfying, and more valuable alternative.

Understanding how to compete

All else being equal, most customers opt for the product with the lowest price. If you want to charge more, make sure that everything else isn’t equal between you and your lower-priced competitor. Most competitors fall into one of the following two categories:

• Price competitors emphasize price as their competitive advantage. To succeed as a price competitor, a business must be prepared to offset lower profit margins with higher sales volume. It also must be prepared to lose its only competitive edge if another business offers a lower price.
• Nonprice competitors gain business through a distinction other than low price. They win business based on superior quality, prestige, service, location, reputation, uniqueness of offering, or customer convenience. They must offer an overall value that customers perceive to be worth a higher price tag. They also need to be able to clearly communicate their quality distinction — for instance: Zero defects, Phone calls returned in four hours, or Delivery in 30 minutes or it’s free.

Defining your direct competition

The first step toward gaining market share is to acknowledge that you have competition and to get real about which businesses are winning the sales that you’re working to capture. On an annual or regular basis, ask yourself the questions outlined in this section.

Moving up the competitive ladder

Most businesses misdirect their time and energy by tackling the wrong competitors. They take on the biggest names in their market area instead of the biggest threats to their business. As you develop your competitive plan of attack, follow these steps:

1. Start by winning market share from the businesses you’re actually losing customers to today.

   Do this even if it involves facing the harsh reality that your customers consider your business among a less prestigious group than you wish they did. After you name your current competitors, study their offerings, their marketing, and the customer service they provide as you honestly evaluate how your business compares.

2. Make a list of the companies you wish you were running with.

   Evaluate why you’re not in that group. Is it because of your business’s image or location? Does the nature of your clientele mark you as a lower-level player? Or do your products and pricing prevent you from competing with the biggest names in your business arena?

3. Consider whether changing competitive levels is advantageous.

   Assess whether your business is more apt to be successful at its current competitive level (think of the big-fish-in-a-small-pond concept) or at the next competitive level (where perhaps you can compete for more lucrative business but where competition may be stiffer and where customers may be fewer or more demanding).

If you decide that your business would be better off competing with more visible and prestigious businesses in your arena, commit to making the changes necessary to get the market to see you through new eyes.

Sizing up your target market

To calculate your share of the market, first define the size of the market in which you compete.

The total market includes the entire nation or world — a market area that matters enormously to major global marketers like Nike or Levi’s. But to a small business like yours, what matters is your target market — the one within the sphere of your business’s influence. You can assess your target market’s size by using the following criteria:

• Geographic targeting: Where are your customers, and how many are there? For example, a retailer may determine that its geographic target market consists primarily of people who live or vacation within a two-hour drive of the retailer’s place of business. An accountant may determine that her geographic target market is concentrated within the city limits. A consultant may target businesses within a five-state region.
• Customer targeting: How many people or businesses actually fit your customer profile? (See Book 1, Chapter 2 for profiling information.) An office furniture manufacturer may target all the nation’s office-furnishing retail establishments, along with architects and interior designers who specify office furnishings. An online florist may focus exclusively on wedding planners and brides-to-be within a single state or region.
• Product-oriented targeting: Sometimes, the most effective way to measure your target market’s size is through an analysis of how many sales of products like yours occur in the market. For instance, a microbrewery may measure its share of a market as a percentage of all premium beer sold in its geographic target area. (The microbrewery wouldn’t measure its sales against all beer sales; it would focus on premium beer sales, because that’s the microbrewery’s sphere of business influence.) Likewise, an attorney who specializes in land-use planning would assess the number of land-use cases in the target market area before trying to calculate market share.

Doing the math

After you have a good sense of your total target market’s size, you can use several approaches to calculate your share:

• Unit sales: Some businesses can easily figure out the total number of products like theirs sold each year. A motel manager in a region that collects a hotel occupancy tax, for instance, could divide the tax the motel pays by the total area-wide tax collection to arrive at the motel’s share of the market.

• Number of potential customers: If you know that 30,000 adults are in your target market area, and if you can make an educated guess that one in ten of them — or 10 percent — is a consumer of services like yours, you can assume that your business has a total potential market of 3,000 adults. If you serve 300 of those adults, you have a 10 percent share of your target market.

  To aid in your guesswork, visit the reference area of your library and flip through the Standard Rate and Data Service (SRDS) Local Market Audience Analyst to find out about consumers in your market area.

  For instance, imagine a fabric and sewing supply store that serves a geographic area that includes 7,000 homes within a 15-minute drive of the store. The owners could find out from the Local Market Audience Analyst that 18.5 percent of the households in the area participate in home sewing. If the store’s owners multiply the 7,000-household market area by 18.5 percent, they’ll discover that they have 1,295 potential customers in their geographic market area. If the owners currently serve 250 of these potential customers, they have a market share of just less than 20 percent — meaning plenty of opportunity for growth.

• Total sales volume: Another way to estimate market share is to calculate how much people spend at businesses like yours in your market area each year and then divide that figure by your sales revenue. For example, if annually in your market area people spend a total of $1 million on products like those you sell, and if your business does $100,000 annually in sales, then you have a 10 percent market share.

  Regional business journals and newspapers compile lists that rank sales by businesses in specific industries or service sectors. Businesses submit their revenues (often slightly inflated, so read them with a realistic eye) as a basis for appearing in these lists. Study the lists for your industry to find clues to regional sales revenues in your field.