When Competition Matters
You should focus on building your business instead of focusing on competition. However, there are some specific times that competition matters!
If you’re building a new business, you are most likely to fail in obscurity. Only a very small number of businesses ever get to having even one customer or user! You should be fighting against anonymity, not competition, in your early days.
Competition only starts to matter when you get to scale, which is often years after you get started. Even when competition starts to matter, it only matters at very specific points of your business. You still shouldn’t be obsessing about the competition, but you do want to study the competition and know them well so at those specific points you can win. In short, you don’t want to always be fighting but when it comes time to fight you want to win.
Here is a breakdown of those key competition points and why they matter:
Competition Point #1: Conversion rates
When you start to find product/market fit, your business transitions from experimentation to growth. Growth is all about optimization, so that you can grow faster for less money as time goes on. This is when competition starts to matter, because competition is one of the biggest factors affecting your customer conversion rates. Let’s look at a few different business processes as examples.
For enterprise software businesses, there is a fairly standard sales process which starts with initial outreach and ends with customer onboarding. During that process there are a few key points where competition matters:
For consumer mobile applications the user acquisition flow, at a high level, is also fairly consistent. Here again there are specific points where competition matters:
In each case there are specific points where competition can make the customer think twice about moving forward. Regardless of your business, the more competition you have, the more options a customer or user has and the less likely they are to make it all the way through your funnel. A customer might need longer to look at all the options, or might find another product for a lower price. You need to spend time identifying these conversion points in your process and understand exactly how competitive options affect your conversions.
To make sure your conversion rates are strong despite competition, you need to be crystal clear about your competitive differentiation and build it into everything you do. A person who learns about your product should know in the first 30 seconds what sets you apart from other options, because if they don’t you might lose them. If your differentiation is clear and meaningful, you can bridge these competitive points and continue to grow fast due to high conversion rates.
At these conversion points, whatever makes your product better than the competition is all that matters.
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Competition Point #2: Growth Ceilings
If you solve your growth optimization problem, you’re on your way! You’ll have high conversion rates, grow fast and before you know it, the small business you started has become quite a large business. This is when you run into competition again, because how big your company can get is greatly impacted by competition.
Don’t get me wrong, the biggest factor in how large you can become is the size of the market you are in, known as your Total Addressable Market (TAM). However, many companies that operate in a huge market hit a ceiling on growth. When you hit that ceiling, it hurts.
So, why does competition contribute to hitting a ceiling on growth?
The first reason is price. If you are growing fast, competitors will start offering comparable products for lower prices to try and gain customers from you. Copycat products rarely differentiate on anything other than price, and their cost basis might be lower since they didn’t have to invest in developing the product in the first place. As a result, you find that you either start losing customers to cheaper alternatives or you are forced to lower your prices which reduces your revenue. Pretty soon, you can be working harder for less money and as a result your growth stalls (See: The Plateau of Death).
The second reason is competitive confusion. Having more competitors means more options which means a larger consideration set for any decisions. Competitors might also get ambitious in their marketing, lying about their features or how they compare to your product. In many cases they will try to deposition you by trying to tell your story for you. Even if you overcome this confusion, it can slow down adoption and conversion rates as users and customers take longer to make decisions or do more research due to the sheer amount of noise in the market. It is like trying to talk to someone at a loud concert, it doesn’t matter how interesting you are if they can’t hear what you are saying.
How do you fight back against pricing pressure and confusion? Again, your competitive differentiation is critical. You need to be worth a premium price because of how much better your product is than the alternatives. You need to be able to stand out in a sea of confusion because of your superior focus and strong customer referrals/references. If you have to spend time explaining why your product is better, you’ve already lost. It should be so clear, so self-evident that it speaks for itself.
Competition Point #3: Fundraising
When fundraising, investors are interested in where your company is heading as much as where it is today (See: Investors buy tomorrow, not today). As a result, they want to look many years into the future when evaluating your business. This means that even if competition doesn’t matter to you today, it matters to investors because it will matter in the future.
All of the competition points we discussed earlier become immediately relevant during a fundraising process, even if they are years in the future for your business. Investors know competition can affect your conversion rates so they will focus on whether you can bridge over those points. Investors know that competition can put a ceiling on your growth, so they will focus on whether you can break through.
Most founders aren’t ready to have these conversations because they haven’t thought about these points of competition yet. After all, their company is years away from dealing with them! However, it’s important you are ready to have these discussions if you want to raise financing. Your answers don’t need to be as specific and clear as they are when you are actively dealing with them, but you need to show there is a viable path to overcoming the competition at these points.
There are many other points where competition might matter to your business, including supply chain sourcing and hiring. Knowing all of these competition points and the specific competition that might affect them becomes an extremely important part of your strategic planning as you grow. It’s worth spending time as part of your annual planning to figure it out.
However, remember that your business is still more likely to fail from other causes. Competition can be important, but it shouldn’t dominate everything you do. Identify the points when you need to worry about competition, and ignore them the rest.