October 1st, 2018 | By: The Startups Team | Tags: Idea Validation
The competitive analysis section of your market analysis in your business plan is essential. Knowing your competition is as important as knowing your product and your customer. Market gaps tell you where to develop your product and internal weaknesses tell you where you’re vulnerable to losing customers.
A solid competitive analysis is your way of showing that you know exactly where you stand among your fiercest competitors — and that you have a way to out-maneuver them. The best way to think of the argument you’re trying to articulate is:
“Here is where we can gain the most customers (offense) and here’s where we could potentially lose them (defense).”
Your competitive analysis should start with your SWOT Analysis — Strengths, Opportunities, Weaknesses and Threats — to borrow a grad school MBA’s favorite acronym.
Your investor is probably thinking something like this:
“This idea sounds good, but I’m worried that current or future competition will simply crush this company. I need to know where they are going to stay ahead of their competition in the minds of their customers. I also need to know how they plan on defending whatever market position they capture.”
So here’s what you can do to reassure them.
Lead with your strengths. Talk about what aspects of your product are the best in class and why your customers will fall in love. Companies win based on their ability to win over customers.
You don’t eat at Wendy’s because it’s less terrible than McDonald’s. You eat there because you like their food a lot more. You also eat there because the Baconator cheeseburger is sooo good!
Talk about why customers love your Baconator. Talk about what you offer that just blows people’s minds. Be very descriptive and dig into how those strengths really stand out. Don’t assume for a moment that because you understand the strengths that anyone else does.
“Ruth’s Chris Steakhouse”
Customers dine at Ruth’s Chris Steakhouse primarily because it is considered the most upscale dining experience in their city. This lends itself well to special events that command a higher price point.
Our customers use Tinder over traditional dating sites because they get immediate responses from potential matches and the interface is so simple it’s fun.
Customers shop in our local boutique because they want the experience of interacting with our staff and the enjoyment of trying on clothes in person.
The best way to present your strengths is to start with your number one greatest strength. If investors don’t think your greatest strength is interesting, you can be assured that your third greatest strength isn’t going to make up for that!
In each of these sections of the SWOT Analysis, begin with a few introductory sentences, like the examples above, and then offer a longer narrative explanation below. If the investor understands the point you’re making in just a couple sentences you don’t want to belabor their attention with a crazy novel of an explanation.
Your opportunities are all about expansion. You realize your competition is sleeping on the job and you’re ready to pounce on that opportunity to eat up some delicious market share.
Your opportunities typically come in three flavors:
1. Areas your competition is currently weak
2. Expansion of your customer’s current needs
3. Untapped markets
Ideally, you can tap into all three opportunity categories or you have some special flavors of your own. Your goal here isn’t to list every last opportunity; it’s to show that the market has obvious room for expansion that viable startup (like you) could build a real business in.
This is one of the few times in life where it’s OK to pick on someone else! If you’ve made it this far into the plan, it’s because you’ve found a good reason that your would-be competition is dropping the ball.
When sizing up your competition it’s important to have a balanced assessment. You want to avoid the straw man argument. The straw man argument is one when you act like you’re refuting someone’s argument, but in reality that argument was never made by that person.
Instead, focus on how well you know the weakness exists. Show that you have done your homework and that you have a real inside track on why this weakness is legitimate.
The more convincing your research on competitor weakness the more excited investors will get. Don’t skimp here.
It’s your job to not only paint a picture of what your customer needs now, but also of what your customer needs next. These needs may not be something you can fulfill now, and that’s fine. What’s important here is that you’re showing that you’re thinking further down the road.
“Our customers who purchase our iPhone will need apps to download, music to listen to, additional cables to charge with, and listening accessories like headphones and Bluetooth speakers.”
Your expansion of current needs should start with obvious extensions of need and then include a few bigger picture potential areas that you may not even get to. It’s good to show what’s more probable and then what’s possible.
If you’re not expanding into current markets then you’re moving into the great unknown — untapped markets.
Untapped markets are equally exciting and terrifying to investors. On the one hand, it gets everyone pumped to think about a ton of low-hanging fruit that can be gobbled up easily. On the other hand, that fruit is often sitting in a grove that may or may not even exist.
Your challenge is to show that these untapped markets do in fact exist (read: show your research) and that you can tackle them quickly and efficiently before your competition does.
“We believe that the market for a low cost version of iPhones in underdeveloped countries is even bigger than the U.S. market, because over two thirds of citizens have no access to land lines or cabled Internet. Our iPhone Lite, combined with a global reach for cellular service, will make this critical line of communication both affordable and accessible to millions.”
Don’t let the idea of untapped markets be a golden ticket to make wild claims. Untapped markets only exist if you can build a cogent case around them. The quality of your case is the difference between an investor nodding their head and shaking it.
Demonstrating your weaknesses isn’t the same as saying “we’re so painfully vulnerable we’re not even viable!” Every business has weaknesses, especially in the startup phase. You can bet anyone leaning into your plan is going to jump on these immediately.
Your goal here isn’t to sugar coat the nature of your weaknesses – it’s to articulate them in exact detail to show that you know precisely where to build a defensible position. Articulating your weaknesses well allows you to talk about what you’re going to do about them.
“Our company, Amazon, is particularly concerned about the fact that customers will want to see higher ticket electronics firsthand before making a buying decision. We believe that retailers such as Best Buy will consistently get customers through their doors first before they elect to make a buying decision with us.
Therefore, we have to create guarantees on the lowest price that will entice customers to view at Best Buy but purchase on Amazon because the savings are so significant.”
In this example, we aren’t sugar-coating the concern. We’re highlighting the fact that Amazon will lose customers to Best Buy, but they’re working toward a strategy to curb that customer loss with a lower price. An investor reading that narrative would feel this is a balanced assessment of a weakness coupled with a viable counter-strategy.
Similar to the Strengths section, a great way to present this is with a few declarative scenarios where you’re most concerned, so that your readers get the gist. Thereafter, craft a more detailed description of why and how those weaknesses and threats are important.
Sooner or later (hopefully later) your competition is going to pose some serious threats to your business. In some cases, it may not even be your competition directly. It could be looming legal issues or governance that you’ll have to contend with.
Similar to weaknesses, founders get nervous about being bold about threats. They think “That will scare investors away!” when in fact being up front about how you identify and mitigate threats is the best way to make investors confident about potential issues.
Your best bet is to get in front of your threats first. Similar to your strengths, list the most painful threats first, then explain how you plan on using some Judo-style moves to take them down.
“The biggest single threat to our Amazon business is the lack of control we have around delivery costs. If UPS and FedEx decide to increase costs exponentially, our ability to deliver products at a total price lower than retailers will evaporate.
To combat this, we will negotiate very long term deals with major carriers. We will offer them an exclusivity on volume in exchange for a predetermined rate plan that we can predict for five to 10 years at a time.”
In this example, we’re pointing out (before our investors can) that an increase in delivery costs for a business that relies on delivery is a big deal. But we’re immediately supporting that concern by providing a credible mechanism to offset the threat.
Investors may still have concerns around what the mechanics of the deals with delivery providers may be, but at least now the conversation is about deal mechanics, not whether delivery as a whole will destroy Amazon.
Think of your presentation of threats in two columns — Threat and Mitigation. List your threat in detail, then list your mitigation strategy. In the best case scenario, you can show investors that you’ve thought of threats they haven’t even considered and already have a plan of attack waiting. It’s that type of presentation that builds much-needed trust during the formative stages of that relationship.
Your competition can be represented as both “categories of competition” as well as “actual competition.”
Categories of Competition allow you to create groups of competitors that may share some of the same attributes such as “online retailers” or an emotional category such as “People who hate to shop in stores.” You may in fact have many different categories that you compete with and then a few specific competitors that you’re concerned about in each. The category approach works well if you have tons of competitors; for example, if you were an online retailer.
Action competition is more specific to who you can count on your fingers. In this case, you want to be very detailed about who they are, what about them is particularly challenging, and what you plan to do about it.
In each case, the goal is to be very clear about why each competitor has strengths and weaknesses that you’re concerned about. You’re better off listing fewer competitors that are a more direct threat and showing that you know how to compete than creating a giant list of every person that has a website that’s tangentially related to you.
The competitive analysis is just one part of your market analysis. Check out our guides to each section of your market analysis in order to create a document that will blow your investors away.