How to size up the competition

For a new business owner, competition from established brands and businesses can seem intimidating. But if you rush into business without evaluating what your competitors are doing, you will miss important learning opportunities and greatly increase your risk of failure.

Bankers and investors know this, so they want to see a business plan that evaluates the competitive environment and explains how you will deal with it. Even if you're not looking for funding, studying your competitors can teach you a lot about how to operate and market your business. And, over time, watching the competition helps you stay on top of trends and keep your loyal customers.

Who are my competitors?

First, you need to identify your competitors. Your competitors offer the same type of goods or services as you, to the same market. Every business has both direct and indirect competitors. Direct competitors offer the same product or service, while indirect competitors might offer something different to meet the same need. McDonald's and Burger King are direct competitors; Burger King and Chipotle are indirect competitors.

For local businesses, a simple Google search will show you nearby competitors. If your business is nationwide, use general internet searches to find the competitors who have the largest share of business, and focus on those. Don't forget about market giants like Walmart and Amazon. If you serve a niche industry, trade group directories can be a good way to find competitors.

What kind of information am I looking for?

Second, as you look at competitors, ask yourself this: "What can I learn from them?" Go to their websites, and monitor their social media accounts. Visit the business in person if you can. For businesses related to a specific industry, attend a trade show and visit their booths. Pay attention to the way the business presents itself and how it interacts with customers.

Some of the questions to ask yourself are:

• What products or services do they sell?
• How do they price them?
• What kind of customers do they cater to?
• How do they make sales? How do they use advertising? Sales reps? What kind of budget do they seem to have?
• How long have they been in business?
• Do they have a competitive advantage, such as size or location?
• Are they expanding or shrinking, and why? (Struggling competitors can mean declining demand, ineffective marketing, or stiff competition. Think about whether this means opportunity or obstacles for your business.)
• What do customers say about your competitors? Look at review sites like Yelp or Google, or, if you can, ask customers directly.

You also want to look for industry trends, to see where the competition might be headed. If you've got a new, trendy business or one that promises great profits with few startup costs, it's likely you'll have more competition in the future.

What should I do with this information?

Ideally, the information you gather will give you a good idea of the way your competitors do business and their strengths and weaknesses. Now you must figure out how you will meet the challenge:

• Can you take customers away from your competitors?
• Is there something they do poorly that you could do well?
• Is there a specific niche you can fill, appealing to a different need or clientele than the competition?

For example, suppose you sell shoes. Your competitors include Zappos and national discount shoe chains. You can't match their prices or selection, but you could offer expert shoe fittings and brands or sizes that are hard to find anywhere else.

You can position your business to appeal to a customer that the competition doesn't serve very well.

The decisions you make, based on the data you gather, will help you identify the kind of customers you want to serve and help you develop your main marketing messages.

Evaluating the competition has other benefits as well—you may pick up techniques or strategies that will help you run your business better. When you watch the competition over the life of your business, you are better prepared to respond to new threats or changing trends, helping you stay profitable over the long haul.

Sizing up the competition takes work, but it is an important part of starting and running a small business. Done right, it will help you distinguish yourself and stay on top of trends, increasing the chance that your new business will be around for years to come.