Small businesses have, in large part, weathered the recent storms from COVID-19 and the rising inflation rates. In fact, a recent study from The Manifest found that 55% of small businesses are looking to add more employees in 2022. Not only are current companies on the upswing, but many entrepreneurs are now considering striking out on their own and starting a business. If you’re thinking about starting a new business or want to improve your existing one, then you need to understand how to conduct a competitive analysis. Evaluating your competition is a great way to find opportunities for your business to differentiate itself. How do you evaluate the competition? Evaluating Your Competition A competitive analysis is a great place to start when differentiating your small business from competitors. This analysis aims to measure your competition based on categories like product or service offerings, pricing, market share, marketing, advertising, company culture, customer response, and other relevant factors. If you’re opening a pizzeria in town, look at what other restaurants selling pizza are doing. How much are they charging? How many offer Chicago deep dish, New York-style, or gluten-free options? What’s the customer feedback online—positive and negative? Through your analysis, you may discover that no local restaurants offer vegetarian pizzas, but feedback online suggests there is demand for it. Using this insight, you might decide to add vegetarian pizza to your menu. You can’t expect to differentiate your business without first knowing what you’re comparing it against. Measuring your competition will provide more insight into their strengths and weaknesses as well as the consumer market, which will allow you to identify opportunities to develop differentiation strategies. How to Conduct a Competitive Analysis Much like a professional sports team watching tape and preparing for an upcoming game, your small business can—should—analyze competitors and develop strategies based on that information. Below are 8 easy steps to help you get started with conducting a competitive analysis. 1. Identify Your Competition Before you can analyze competitors, you need to know who they are. Build a list of your competition and categorize them as: Direct Competitors: Direct competitors are businesses offering the same goods or services as you. If you’re starting a laundromat, it would be the other self-service laundry businesses in your area. Indirect Competitors: Indirect competitors are companies that offer different products or services but target the same customer need. If you own an Italian restaurant, a Peruvian restaurant would be considered an indirect competitor. They don’t offer Italian food, but they are restaurants targeting customers looking to dine out. 2. Determine Key Metrics The next step involves defining what metrics you find important to compare your competition against. The information you find important will often depend on the industry within which you operate, but it should aim to answer critical questions that will help you differentiate your business. For example: Market Share: Using any available information and your best estimate, what percent of the market do you and your competition hold? Product or Service Categories: What are the overarching goods or services each competitor offers? For example, some CPA firms offer tax, audit, and business evaluation services while others only offer tax services. Offerings Within Categories: You can get more granular within each category and list out all the available services or products they offer. Home goods businesses often offer candles, but what are the available scents? Pricing: How much do they charge customers? Are there unique payment terms? Accessibility Options: What methods do they make available for receiving the goods or services? This might include in-store only for brick-and-mortar businesses, at-home delivery options for eCommerce competitors, virtual or in-person options for service-based businesses, or a combination of options. Delivery Fees: If they deliver the goods to the customer, what do they charge? Delivery Timelines: Do they specify how long it takes to receive the products or complete the service? Can you track down information from reviews or past customers? Incentives: Do the competitors have loyalty programs, discounts, or other incentives for new or past customers? 3. Measure Your Competition You now need to collect information from your competitors with the key metrics in mind. Some of the questions will be easier to answer than others (i.e., what goods or services do they offer?), but you should strive to find the answers to all the metrics you labeled as important. It’s also worth including other details that you find through this discovery process that you didn’t identify as important originally. For example, are your competitors minority-owned businesses? If you’re a woman or person of color (POC), this could be a differentiator that you may not have considered. When you’re measuring your competition, consider using Excel or Google Sheets to store this data into a spreadsheet so you can compare and analyze the information more clearly in future steps. You will also want to revert back to this data in future evaluations, so making it accessible and editable is important. 4. Measure Your Own Business To this point, you’ve identified your competitors, selected the important metrics, and measured your competition. Now, you need to perform the same evaluation of your own business. Because you have unfettered access to your own business, you should be able to answer all the questions accurately. It’s important to be honest and unbiased in this stage, even if you don’t love the findings. 5. Clean the Data Data alone can be messy and hard to glean information from, so take time to clean the data you’ve collected before you try to interpret it. Make sure you use the same format, remove missing fields, and consolidate redundancies. For example, if you couldn’t find a delivery timeline for one of your competitors, it may have been input as 0, which could also mean sameday. This error could drive down the average and misrepresent that competitor. If you replace the 0 with N/A, the average will be based on the competitors that actually offer delivery. You may also want to create separate fields to make filtering and comparing your findings easier. In a previous example, we mentioned the variety of candles available at most home goods stores. Instead of comparing each literal fragrance type, you could create a new field that counts how many variations of candles are available. This new numbered field is easier data to work with. Your analysis is only as good as the data used, so take time to carefully validate and clean the information before you begin analyzing it. 6. Organize the Data With the data collected and cleaned, it’s now time to begin pulling out the important findings from your research and organizing the information in a way that’s easier to digest. There are several different ways to approach organizing competitor data, and there is value to each. Rather than telling you the best way to display your findings, consider some of the methods below and which might work best for your data set. Rankings: A simple ranking of your results for each metric is a great place to start when evaluating you and your competitors. With the candles example above, you may find that some stores have less than 10 variations while others have 100 or more. Ranking based on that field will indicate where you fall in relation to the rest of your competition. Averages: Finding the competitor average can offer more perspective on how you compare for that metric. For example, if the average price to clean a pool in your market is $100 a month, you can see whether you are below, above, or in-line with the average price. Extremes: Looking at the best and worst results for a metric can provide another valuable finding in a competitive analysis. If you want to start a consulting business, which of your competitors has the most and least amount of experience? How do you compare? Graphs/Charts: Visualizing data can make it much easier to understand what you’re looking at. Instead of a huge set of numbers, try organizing it into a graph or chart to make comparing easier. For example, putting market share into a pie chart makes it easier to see how you and your competition compare. 7. Review, Drill Down, and Flag Findings for Additional Research With your data collected, cleaned, and organized, you’ll now be able to dive further into your findings. This is your opportunity to take an unbiased look at where you rank compared to your competition. If you discover something interesting, take time to drill down into that data and consider conducting additional research. For example, if you run a gym, your data might include hours of operations. If you drill down further into this, you might discover that only one of your competitors has classes between 5 and 6 in the morning while all the other gyms don’t have organized classes until after 7 am. This could be a finding worth exploring further, and upon additional research might reveal that those classes are always filled while the other gyms’ morning classes are not. To illustrate the point further, let’s continue with the Slice of Heaven Pizzeria example that we’ve used throughout. Slice of Heaven’s average price for individuals ($7.50) and families ($18.95) are well below the average prices of its competitors. If we dive deeper, we find that Slice of Heaven’s number of pizza options (10) and average ticket times (30 minutes) are both better than the most expensive direct competitor (Pete’s Pizza), which is also the closest in proximity. With this information in mind, Slice of Heaven may want to consider raising their prices. 8. Summarize Your Findings The final step in the competitive analysis process is to summarize your findings. By this point, you should have found several takeaways and important pieces of information that can help guide your decision-making. To make it easier for you to revert back later on, put those thoughts into a summarized report or SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis. A SWOT analysis is a strategic planning exercise that requires mapping out your business’s strengths, weaknesses, opportunities, and threats. Given the information you’ve collected by this step, you should have ample resources to build a thorough SWOT analysis measuring your business compared to your competition and the market. The goal of this final step is to provide yourself with a resource that you can use to make better strategic decisions moving forward. For example, if you were the gym owner from the previous example, you may see opening a 5 am class as an opportunity based on the success of your competition, which could guide you to offering 5 am classes at your gym. Don’t Just Analyze, Take Action A competitive analysis is the first step in learning how to compete on Main Street, but it doesn’t stop there. The goal of analyzing your competition is not merely to see how you rank, it’s to provide you with actionable insight to guide your strategic decision-making. Actionable insight requires, well, action. Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.