Market Competitor Strategies: When Direct Competition Moves In Next Door

Editor’s note: This is part 3 in our series on small business competition. Read Part 1: Analyzing Your Competition and Part 2: Differentiating Your Small Business 

Let’s pretend you own and operate the only hotel in your town for the last 20 years. If people are visiting, they’re staying with you.

For as long as you can remember, you’ve controlled the market. You set the price of the rooms. You picked the wallpaper, sheets, TVs, coffee, and refreshments available in the rooms—you even control the room service menu. In other words, you have had complete reign of the hospitality market in your town and have been able to run your hotel the way you see fit.

However, a new Hilton hotel is scheduled to open nearby in a few months, and you’re worried about what that means for your business. Will you be able to compete with a global brand like Hilton?

Small businesses across the country often face a similar dilemma: they own an established business that they’ve run for many years successfully until being suddenly confronted with a new competitor. Sometimes these new competitors can be big brands, but many times they are other local small businesses.

In either case, learning how to manage new competition is important when competing on Main Street. 

Know Your Competition

Competing in business is no different than competing in a basketball game or chess match—you’re looking to exploit vulnerabilities in your opposition and find strategic opportunities to advance your position. These “opportunities” are not always easy to see and often require perspective and context, which can only be gained through careful research and analysis.

As with any guide on business competition, determining strategies starts with analyzing your market and the competitors within it. For established businesses trying to defend their territory from new competition, this means taking the time to understand exactly who’s entering your market, the value they offer customers, and how their arrival will affect you and your other competitors.

For example, maybe you run a successful lawn care business and have operated in your town for 10+ years. You have a base of established accounts and pick up new projects as others fall off month to month. If a new lawn care business decides to enter your territory, how will it impact your business?

If the owner is a local who has lived in your town for many years, they may have a sphere of influence (friends and family) that overlaps with your customer base. This may cause you to lose some accounts because of their relationship with your new competitor.

If you know the owner and their network, you can plan for the potential loss in revenue by adjusting your forecast and budget, or even by taking steps to mitigate the customer defection by offering incentives to stay with you.

In other words, if you know your new competitor and the potential challenges they present to you and your business, you can make better strategic decisions.

Understand Your Unique Difference: Differentiation

There’s a reason you’re still in business, a reason you survived the lockdown and increasing inflation rates—so what is it? What makes your business unique from any other?

The answer to this question is crucial to the longevity of your company—especially when faced with new competition. Knowing your unique difference, or differentiation strategy, gives you a better understanding of why your customers choose you, which you can then use to retain or grow your book of business.

Let’s say you’ve operated a small independent tax accounting business for the last 15 years and are worried about a new H&R Block opening up a few minutes from your company. After filing your clients’ taxes, you ask them a few questions about why they like working with you over any of your other competitors.

You might find that they appreciate the personal care that you provide or they know you’re an active member of the community. Your customers are choosing your business because of you.

With this insight, you could prepare for the opening of H&R Block by becoming more involved within the community and developing marketing collateral to communicate the personal care that you provide as an independent tax accountant and not a corporate entity.

Once you understand what makes you different, you can use that to defend your market share from new competitors.

Lean On Loyalty

Customer loyalty shouldn’t just be a focus when managing new competition, but new competitors may provide the extra motivation needed to address customer retention strategies. Companies that emphasize loyalty and reward customers for their business are bound to see huge returns from their efforts.

The statistics below drive home the importance of customer loyalty to small businesses:

• The probability of selling to a prospect is 5−20%, compared to 60−70% for an existing customer.
• A 5% increase in customer retention can increase profits by 25−95%.
• Highly engaged customers spend 300% more—and 90% more often. 

Customer loyalty and rewards programs are one way to incentivize your customers to choose you over your competition, new or old. In fact, it’s estimated that loyalty programs can generate between 12–18% more revenue.

There is no shortage of options for loyalty programs, and the best solution for your business will often depend on the industry within which you operate. Some popular options for loyalty programs include Square Loyalty, part of the Square software umbrella; Clover Rewards, another POS provider; or the tried-and-true loyalty punch card that rewards frequent customers.

Beyond loyalty programs, consider asking customers for:

• • Referrals: Customers you acquire through referrals are more likely to convert and stick. It’s estimated that referred customers have a 37% higher retention rate.
  • Reviews: Online reviews can be a huge differentiator between you and a new business, especially considering 89% of customers read online reviews before making a purchase. You have the experience and history, make sure your online presence reflects that.
  • Feedback: Customers want to feel like their voice is heard, so take time to ask your customers for their feedback and be willing to make changes when warranted.

Be Open-Minded And Adaptable

If you want to fend off new competition in your market, it might require making changes to your business. While many small business owners get caught up in “the way they’ve always done it,” that mentality can be detrimental when a new competitor arrives and shakes things up.

For example, maybe you operate a small bakery that has always been cash only, because you don’t want to deal with the processing fees from credit card purchases. While you may have been able to operate this way for many years, if a new bakery decides to enter your market with more flexible payment options, you could see customers leaving because of convenience.

In that scenario, your business has 2 options: continue operating as a cash-only bakery or start accepting credit cards.  

Managing new competition may sometimes require adapting how you run your business. This could mean implementing something as simple as adding new payment options or more complex changes like pivoting your business or eliminating certain products or services. Regardless of the scale, it’s important to approach change with an open mind and to remain flexible.

Don’t Be Afraid Of Competition

America was built off free-market competition, and a recent executive order from President Biden called for “the promotion of competition and innovation by firms small and large, at home and worldwide.”

Competition breeds innovation and is often in the best interest of consumers.

If you operate a business for an extended period of time, you’re bound to face new competition. Don’t shy away from competitors or be afraid of competition; instead, embrace and grow from the experience.

In addition to benefiting consumers, new competition is actually good for your business, because it:

• Forces you to analyze and improve your own business: It can be easy to get complacent within your business if you’ve been operating it unopposed for a while. New competitors force you to reassess and improve your operations, which can increase your efficiencies and profitability.

• Leads to specialization and focus: New competitors can also help established businesses find their differentiation strategy, which can lead to specialization and better focus. They say a jack of all trades is a master of none—an adage which can also apply to your business. Sometimes competition can help you discover what it is you do best, which can provide more clarity and focus as you grow your business.

• Provides another informative resource: Besides the internal analysis that happens when competitors enter your market, you should also view new competition as valuable resources to study. Watch how they operate and see if there are any insights you can glean from their business. Do they have lower prices? Do they have different offerings? Are there opportunities to improve your own business based on the information you gather about theirs?

Managing New Competition: FAQs

How do you deal with new competitors?

You have several options when it comes to dealing with new competition in your market. You can do nothing and hope that your brand equity sustains any changes to the consumer landscape, or you can analyze your competition and find ways to improve your business. 

The best way to deal with new competitors is to embrace the challenge and use the competition to motivate you to grow. This motivation could drive you to get rid of unnecessary waste and resources, pivot your business to more profitable activities, or simply improve your operations, adding more value to your customers.

If you view new competition as an opportunity to improve your business, you’re likely to find ways to benefit from this perceived negative.

How does new competition affect your business?

The effects of new competitors on your business will depend on the market and industry within which you operate. Generally, most small businesses feel the effects of new competition through lost customers and sales.

The more options available to your customers, the more likely they are to choose someone else. When more competitors enter a market, it makes it harder for established businesses to maintain their previous level of market share. 

Beyond the bottom line, competition can also challenge the way established businesses operate by offering new perspectives and solutions to customers. For example, consumer demand for taxis was forever changed when ride-sharing apps like Uber and Lyft made transportation easier and more convenient for riders.

What are examples of new competitors?

Small business competitors, whether new or old, have 2 distinct categories: direct or indirect competition.

Direct competition includes businesses that offer the same services or products as your small business. If you run a daycare service, any other daycare business is a direct competitor because they’re offering parents the same service as you.

Indirect competition includes businesses that target the same customers but offer a different product or service than yours. Instead of daycare businesses, after-school tutor services could qualify as indirect competition because they attract the same customers, offering different services that satisfy a similar need: supervising children.

New Competitors Means New Opportunities

Competing on Main Street often requires self-reflection and strategy, and managing new competition is no different. You can’t prevent competitors from challenging your business—you can only control how you handle these new challenges.

By taking the time to assess your current situation alongside the potential effects of a new competitor, you can find opportunities to improve and grow your own business. While you may see a downturn in business at the onset of a competitor’s arrival, if you stay focused and continue looking for ways to improve, you’re likely to find yourself in a better position down the road.

Disclaimer: 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. Any content provided by our authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.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.