How to Conduct a Competitive Analysis

Practical advice on how to shape your new business

Competitive Analysis?

"Build a better mousetrap, and the world will beat a path to your door," goes the old saying. However, the reality of starting and running a successful small business is somewhat more complex than that. And it all begins with a solid competitive analysis.

A competitive analysis is an essential part of getting your business up and running and offers crucial information about what others in your line of business do, including the services and products they provide and the prices they charge. But it also helps clarify what you hope to accomplish and how you expect to succeed — in effect, helping you to design that better mousetrap.

Elements of a Competitive Analysis

Many small business owners believe they offer something their competitors can't, and that customers will come running to get it. But being successful — and even getting financing — requires more than your ego. Performing a competitive analysis is the best way to understand what you're up against, and how your company or idea stacks up. Its findings help you understand your position in the market so you can identify opportunities, understand consumer behavior, make better decisions and develop marketing messages.

Although the details differ from industry to industry (e.g., product or service, brick-and-mortar or digital storefront), a competitive analysis will always have common fundamental elements. Presented in a grid, the analysis should include the following information about your business and its direct and indirect competitors:

  • Name and attributes of the product/service, including pricing
  • Value proposition and key differentiators
  • Target market and market segments served (defined in a target market analysis)
  • Market share
  • How the product/service is marketed and any marketing messages
  • Strengths and weaknesses
  • Threats competitors pose to your business, and your threats to theirs
  • Potential opportunities for you to seize market share and address competitors' shortcomings (and their opportunities as well)

Where Can You Find Competitive Analysis Data?

You can gather the information for a competitive analysis from a variety of sources: industry and trade associations; business and specialty magazines and Web sites; Hoover's; annual and 10-K reports; trade shows and analyst reports. You might even be able to secure information from the competitors themselves.

"I think people who are starting businesses and have questions would be amazed at how helpful another business owner will be," says Tom Dugan, CEO of Philadelphia's Recovery Networks. "I would highly recommend that. I wish it was something I'd done sooner. Now I do it all the time."

Get the Customer Perspective

When researching your competitive analysis, query potential customers about your offering, the competition and the marketplace in general. But asking the right questions of the wrong people will be a wasted effort, so do a target market analysis to identify your key customers.

"The trap that most people fall into is not having a well-defined target market," says Chicago-based consultant Brad Farris, founder of the online small business community Enmast. "It has to be more than 'people with a checkbook.'"

The most important elements of a target market analysis are:

  • Distinguishing characteristics, including customers' critical needs (also called "pain in the marketplace"), whether they're being met or not, and demographic and geographic information. Also include anything you know about customers' buying and spending habits. You might even develop personae that describe your customers in qualitative terms.
  • Market data, including the number of customers in the market, their annual purchases, the share of that market you think you can earn (in terms of percentage and number) and forecasted market growth. Explain the assumptions that lead to your estimates. Much of this information is available from the Small Business Administration and industry trade groups.

Hugh & Crye CEO Pranav Vora cofounded the Washington, DC-based menswear label in 2010 on a belief that men would benefit from better-fitting, off-the-rack shirts. His competitive analysis didn't just entail checking out other labels. The team surveyed and measured more than 400 friends, associates and volunteers. "If there's an expert opinion," Vora says, "it's our customers'."

Worth the Investment

While a competitive analysis may seem like a lot of work, especially when you're busy trying to begin operations, it's a critical step you shouldn't rush or avoid. The process yields valuable information on where you stand in the marketplace and how to leverage your position for maximum success. And that creates the confidence you need to pitch your idea to lenders, recruit employees and get the customers you need.

"It's less about an exercise, an algorithm that will pop something out," says Vora. "It's more about believing in yourself and your product."