What is a Direct Competitor?
A direct competitor is another business that offers the same solution to fulfill your customers’ needs as your business does.
Direct competitors represent the most visible competitive pressure that most businesses face, though they are far from the only one.
In addition to direct competitors, businesses face competitive pressure from indirect competitors, the power of customers, the power of suppliers, the threat of substitute products, and the threat of new entrants (these are explained in more detail below).
Examples of Direct Competitors
Purchasing decisions are based on needs.
When more than one business offers a solution to that need, these businesses compete with one another. To be considered direct competitors, the businesses in question must offer the same solution to fill that need for the same target market.
Two pizza shops in the same neighborhood are direct competitors.
They both provide the same solution to hungry customers. In this case the “solution” is pizza, convenience, and proximity.
Both pizza shops may attempt to differentiate themselves from one another by offering different unique options, delivery, or order-ahead services, but fundamentally both shops offer the same solution to customers seeking pizza (the same target market).
Yahoo!, Bing, and Google are all search engine direct competitors. When a customer logs on to find information, each of those search engines offers the same solution to that need.
The same goes for Verizon and Sprint, Coke and Pepsi, and Petco and PetSmart.
When competitors offer a different solution to the same target market, they are indirect competitors.
A pizza shop and a sandwich shop in the same neighborhood are indirect competitors.
They provide the same solutions of food, convenience, and proximity to the same target market, but in this case the products are different.
How to Deal with a Direct Competitor
The best way to tackle a direct competitor is to differentiate your own business and focus on what makes it great.
The more you can differentiate your business, the clearer the choice becomes for customers in your shared target market.
In this sense, you are effectively transitioning direct competitors into semi-indirect competitors. The specific blend of core competencies that your business has mastered to set itself apart from others is known as your unique selling proposition (USP). By developing and honing your USP, you communicate to members of your target market why they should choose you over the competition.
Other Competitive Pressures
Competitors—both direct and indirect—are not the only competitive pressures that businesses face.
The bargaining power of suppliers, the power of customers, the threat of new entrants to an industry, and the threat of substitute products all exert competitive pressure on businesses.
The Power of Suppliers
When relatively few suppliers control the flow of goods, they have more bargaining power to control prices. If competition within the industries of your suppliers is high, these suppliers often lose power. When this happens the prices and other concessions that suppliers can demand are reduced.
The Power of Customers
When there are relatively few customers in a target market, those individuals have the ability to make demands of the companies they do business with. Lower prices, more value, and other concessions are all effects of doing business in an industry that has powerful customers.
This competitive pressure can be mitigated by moving into new markets and increasing the number of customers (thus decreasing your reliance on each customer).
The Threat of New Entrants
Let’s say you run a pizza shop in a neighborhood that also has a sandwich shop. We already know that the sandwich shop is your indirect competitor, but competitive pressure can also come from the ease with which a third company could open a new business.
If it is easy for someone to start a taco stand in your neighborhood, then that taco stand, as a new indirect competitor, will take some of your target market away. Worse, someone could start another pizza shop and compete directly with your business.
The Threat of Substitute Products
In the case of our pizza and sandwich shop examples, each represents a substitute product for the other. If you are hungry, both a slice of pizza and a sandwich are suitable meals. Between pizza, sandwiches, other restaurants, and grocery stores, a pizza shop experiences a high degree of competitive pressure from the potential of substitute products.