Market Competitor Strategies: Responding to the Moves of Your Direct Competition

Editor’s note: This is part 4 of a series: Competing on Main Street; see also Market Competitor Strategies: When New Competition Moves In Next Door; Market Competitor Strategies: Analyzing Direct and Indirect Competition; and Market Competitor Strategies: Differentiate Your Small Business from Competitors.

Kenny Rogers had it right: it is important to understand how to approach different situations and learn to deal with the cards you are dealt—literally and figuratively—particularly when you’re addressing market competitors.

The same sentiment from “The Gambler” applies to small business owners considering their best move forward with competition on Main Street. As a business owner, you need to know when your competition makes moves, how their moves affect your business, and what you need to do in response.

Much like gambling at the poker table, you can increase the odds of beating your business opposition when you understand the strategy behind their moves and your available options.

What Are Common Moves by Small Business Competitors?

Small businesses in any industry or market have several strategic moves available to them, including your own.

Whether it’s a market competitor opening another location close to yours, a business deciding to slash their prices for the summer, or the launch of a new product in your space, the moves your competitors might make can be broad and with varying significance.

For example, if you run a Mexican restaurant, you may have a cross-town competitor launch a special on Tuesday night’s “Taco Tuesday” that offers a significant discount to patrons. You may also have a Mexican food truck that partners with the brewery across the street from you, where a lot of your walk-ins come from. You know that responding to both these moves is important … but after assessing the competition and situation, you prioritize the food truck across the street because your analysis indicates that it is likely to have a more immediate and bigger impact on your business.

Some of the common competitive moves you may face include:

• Market Competition Lowers or Raises Prices: Changing prices is one of the most common competitive moves made by small (and large) businesses. With an estimated 92% of customers comparing prices before purchasing, it’s also one of the most effective ways to gain a competitive advantage. Whether competitors are decreasing or increasing their prices, you have to determine how your business will respond.

• Market Competitor Invests in a Marketing Strategy: Businesses of all sizes will often turn to marketing and advertising when looking for opportunities to gain market share from the competition. If you hear your competitor on the radio or see their ad on a billboard, how would you respond?

• Market Competitors Expand Their Business: Your competitors may decide to expand their business through additional locations or by purchasing new equipment or assets to further their production capacity and scale. If you run a junk removal business and one of your competitors purchases an additional truck and trailer to increase their output, how will that impact your business and what should you do about it?
  
• Market Competition Changes Product or Service: Competitors will often add or remove products or services from time to time, creating opportunities or challenges for your own business. How you respond to changes in your competitors’ offerings can have a significant effect on your short- and long-term growth.

How Do Direct Competitors’ Moves Affect Your Business?

Recognizing when your direct competitors make a move is important, but even more so is the ability to know how it will affect your business. If you run a local web design company and your competitor starts contacting your clients, do you know how that will affect your business? Are your clients going to defect to your competition?

While every industry, market, and business is unique, below are a few potential outcomes of different competitive scenarios in businesses.

Direct Competition Lowers Their Prices

Competing businesses can go months or even years without changing their prices, and this period may sometimes feel like a ceasefire during the inevitable pricing war. Then, out of the blue, your competition decides to break this unspoken truce and lower its prices.

Immediately, you may feel pressured to lower your own prices to match—but is that the right move? Before you take any action, you need to understand how your business is impacted by their lower prices.

When competition lowers their prices, it can:

• Change customer expectations: There’s a value exchange anytime a customer purchases a product or service, and the price of that purchase is the quantifiable measurement of said value. When a competitor lowers their prices for a similar good or service to yours, it can change the customer’s perceived value either positively or negatively depending on the quality of your goods or services. If your quality is similar to or worse than the competitor’s, customers may choose your competition because they are receiving more value.
  
• Signal an industry change: Your competition may have lowered their price because they found a way to lower their own costs and want to pass those savings onto the customer. Whether it’s new equipment, improved technology, cheaper materials, better vendors, or operational changes, the move to lower pricing could signal a larger change within the industry or market.
  
• Influence market share: Market leaders don’t usually spearhead price wars, it’s usually businesses with a smaller share of the pie or new companies entering a competitive market. In either case, when a competitor has lower prices, it can influence market share in their favor—if they can sustain those lower prices.
  

To truly understand the impact of a competitor’s lower prices on your business, consider talking with your customers and gaining some additional insight into their loyalty and perception of the competition’s new prices. 

Market Competitor Steals Your Best Employees

You may not realize it, but your employees are some of your most valuable assets, especially your best ones. And, if a competitor swoops in with a better offer, would they jump ship?

Odds are, yes.

We’re currently in the midst of the “Great Resignation,” with US employees quitting jobs at rates unmatched over the last 20 years. Your small business isn’t just competing with other companies for customers, it’s also competing for talent.

If your employees are switching to your competitor, it can have a significant effect on your business. It causes productivity to decrease—the highest-performing employees are believed to be 4x more productive than your average employee. It also costs a lot of time and money to replace them with the average US company spending approximately $4,000 and 52 days finding a new employee. Moreover, employees for small businesses often develop strong relationships with customers, so if they move to a competitor, those customers may follow.

Direct Competitor Introduces a New Product or Service

Many businesses will introduce new products or services to their customers in an effort to diversify their portfolios and add value. If your competitor launches a new product or implements a new or improved service, customers are likely to notice.

For example, even before the pandemic and global lockdown, retailers—including small businesses—were implementing more flexible check-out experiences with services like home delivery or buy-online-pickup-in-store (BOPIS).

One study from the National Retail Federation found that 70% of shoppers said the convenience of BOPIS improved their shopping experience. If you run a retail store and a competitor launches BOPIS for its shoppers, you may see customers opt for the convenience of your competition.

When your competition introduces new products or services, customers may reevaluate their needs. If it’s disruptive or isn’t easily replicated, it can differentiate them from you and other similar businesses in your market—making it challenging to overcome. This could lead to lost customers or worse if it renders your business obsolete (video rental stores, one-hour photo labs, record stores).

How to Respond to a Competitor’s Move

So far, we’ve discussed common competitive moves and how some of those moves affect businesses differently, but the real question is, what do you do? How should you respond when a competitor takes aim at your business?

1. Acknowledge and Assess Their Competitive Strategy

Before you can respond to a competitor’s move, you need to recognize and contextualize it. This requires monitoring your competition on an ongoing basis and staying updated on your market and industry.

Conducting periodic competitive and market analyses is a great way to keep a pulse on what’s going on with your competition and the industry as a whole. You may also want to check your direct competitors more frequently for common changes related to pricing, products, and marketing.

2. Measure and Forecast Its Impact

After you’ve discovered a strategic move by your competition, the next step is measuring its effect on your business. Depending on the move, you may already have noticed a change in your business—more times than not, however, you’ll need to forecast and estimate its impact.

For example, if a competitor has lowered their pricing on a product you also offer from $10 to $9, you should try to predict the impact that change will have on your business before making any response.

If that product costs you $6, a change from $10 to $9 decreases your profit by $1 per sale. If you want to go a step further (and you should), try to predict the total effect it could have on your revenue by estimating how many customers you expect to lose (and keep) if you don’t lower your price.

Let’s say over the course of a year, you average 2,000 sales of that product. If you lower your price, you’ll retain them all—if you don’t, you anticipate losing 500 sales. At first, losing 25% of your sales may seem like a red flag, but let’s look at the numbers.

In this scenario, you end up with the same profit at the end of the year regardless of whether you lower the price or not. With this knowledge in hand, you can make the best decision for your business using actual analysis and not instincts alone.

By anticipating the impact of the competitor’s move on your own business in the short and long term, you can make better strategic decisions.

3. Determine Your Options and Your Own Best Competitive Strategy

When your market competitor makes a change to their business, you have an endless amount of responses available. To avoid a knee-jerk reaction, take time to list out all your potential moves and the impact of each.

It’s important to remember that when assessing what response to take, consider the relevant external factors—you’re not operating within a vacuum.

For example, if a competitor is stealing your best employees, an immediate response might be to raise your employees’ pay. However, this doesn’t consider other factors like rising inflation, which may already be eating away at your profit.

Increasing pay could be a short-term solution to losing valuable employees, but it could lead to long-term revenue issues, which may eventually cause you to cut back your employees’ hours—driving employees away again.

If you don’t take the time to analyze your options, you’re not going to consistently make the right decision. In the example above, the actual answer to keeping employees loyal could be unrelated to pay altogether. Maybe your employees want more flexible work schedules, better training, more ownership, autonomy, or any number of other non-monetary benefits.

Before making a decision, take a beat to assess all your options. You may even find that your best response is no response at all.

4. Make Your Move, Measure the Results, and Adjust If Needed

After you’ve made the decision on how to respond to your competitor’s move, the next step is to simply execute it and measure its results over time. While you may have estimated its impact prior to taking action, you should still track performance afterward—in case a change is needed.

For example, in the pricing example from step 2, we estimated a loss of 500 sales annually if the price was not lowered to $9. If you break this out monthly using seasonal sales trends from previous years, you should have a rough idea of how many sales you expect to lose monthly.

After three months without lowering the price, you can collect sales data for that product and compare it to what you forecasted. If sales are in line with what you expected, great! If they’re much worse than you anticipated, you may decide to pivot and lower your price.

Businesses must aim for agility when it comes to their competitive response. While not every scenario will allow the same flexibility of raising or lowering prices, a willingness to assess business decisions objectively and make swift changes as needed is what’s most important.

Competing in business comes with a lot of chance and unpredictability. What may have been the right decision from every analytical perspective could end up failing, and that’s okay. Don’t be afraid to be wrong—but when you are, be willing to correct it.

FAQs

What is market share?

Market share refers to the entire consumer pie for a specific industry or market. It’s the percentage of total purchases for a product or service that a company makes up.

For example, if your business makes $100,000 a year and all your other competitors combined make $900,000, the entire market is $1M—of which you own 10%. Your market share of 10% means there is 90% of the market available to you.

The excess market share is your growth opportunity. With 90% of the market available, you can make strategic moves to begin capturing more of that share.

What are competitive strategies in business? 

In business, a competitive move refers to a deliberate strategic change by one company with the purpose of increasing market share. Most competitive moves involve strategies related to pricing, product/service, customer relations, costs, or marketing and advertising.

When a competitor makes a strategic move, other businesses within that market must decide how to respond. This can create market pressures that lead to price wars, innovation, and other consumer-friendly benefits. In short, competitive moves are the driving force behind a free market.

How quickly should businesses respond to a direct competitor’s move?

When responding to competition, it’s best to act as quickly as possible after you’ve made your decision. However, it’s important to give yourself enough time to assess the situation from several vantage points.

First, you need to understand how the competitor’s move will affect your business, customer perception, other competitors, and the market as a whole. You then need to outline all your available responses and the impact each will have on your business.

With all this information in hand, you are now prepared to make an educated strategic decision—not simply the first or easiest choice.

Play the Cards You’re Dealt

Running a business is a lot like playing poker. You’re competing against several others and all striving for the same goal (to win). You’re also constantly evaluating risks and making strategic decisions based on the information available—both present and historical. Finally, you’re not going to win every time, and you can’t dwell on the losses.

So, the next time you hear Kenny Rogers’ “The Gambler,” think about how that applies to running your business—especially as it relates to competing on Main Street. You may come away with more clarity and understanding of how to simply play the cards you’re dealt.

_{Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}