We have probably all heard about the two different kinds of competitors; direct and indirect. But what does that mean? Are indirect competitors relevant? Should we only look at direct competitors? How do we tell the difference?
I like to use the analogy of a pickup truck versus a trailer. I used to drive a Chevrolet Suburban. It was great to haul the family on vacation, or load up most of a baseball team to go to a tournament. But when I needed to really haul something of any size, like a BBQ grill, a motorcycle, or lumber for a treehouse, I needed to use a trailer.
On Thanksgiving Day a few years ago we were visiting family in our small hometown in Illinois. After nearly 30 years of watching and avoiding deer on the country roads, it was my turn. While traveling from my wife’s family farm 8 miles out in the country back into the big city (population 1500) we encountered a deer. Under the sharp eyes of a few local disgruntled deer hunters, it was determined the event totally destroyed the front end of my Suburban. So now it was decision time. Do I keep using a trailer and get another SUV, or do I go with a pickup truck?
In making the decision, I looked at both direct and indirect competitors. When looking at pickup trucks, I looked at other brands, and other styles. These are direct competitors. Selling the same product into the same market. But I also looked at SUV’s that I could use a trailer with. In this scenario, the trailer is an indirect competitor of the pickup truck. It is not the same product in the same market, but it is an alternative to accomplish the same task.
A simple way to identify indirect competitors is to think of all the alternative ways a customer might accomplish the same task. A paper shredding service does not sell paper shredders to the consumer, but yet they are an alternative to a consumer buying a paper shredder. The shredding service indirectly competes with the paper shredder manufacturers. This is a needs based comparison. The consumer needs to have his or her paper shredded. Much like the trailer solves the need of hauling.
As I looked at other brands of pickup trucks, when they were exactly the same features set like four doors, four wheel drive, that analysis would be considered a brand comparison. If all pickup trucks were considered, like those with only two doors, and two wheel drive, then the analysis would be a category comparison.
When conducting competitive analysis, we first want to select the scope of the analysis (needs based, category, or brand). Then identify all the possible competitors for the analysis.
- Needs based: Pickup trucks, trailers, truck or trailer rental companies, borrowing/renting from a friend.
- Category: All pickup trucks, regardless of features.
- Brand: Ford, Chevy, Dodge, etc. Specific models with four doors and four wheel drive.
List three to five indirect competitors that are an alternative to your prospect selecting your product or service. (needs based competitor)
It is important to note that if you are building a local or regional business, you will also have to consider national competitors who either already service your market or could without too much difficulty.
Photo credit to Jingoba