What is an inDirect Competitor?
An indirect competitor is another business that offers a different solution to the same target market as your business.
Together with direct competitors, indirect competitors represent the most visible competitive pressure that most businesses face, though they are far from the only one.
In addition to direct and indirect competitors, businesses face competitive pressure from the power of customers, the power of suppliers, the threat of substitute products, and the threat of new entrants.
Each of these competitive pressures are explained in more detail below. First let's dive into exactly what an indirect competitor is.
Examples of Indirect 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 indirect competitors, the businesses in question must offer different products or service to fill the same need for the same target market.
If this is the case, these businesses are participating in indirect competition.
A pizza shop and a sandwich shop in the same neighborhood are indirect competitors. They both offer similar solutions—food for hungry customers, convenience, and proximity—but the exact solution is different.
A customer looking for pizza will not be satisfied with what the sandwich shop has to offer and vice versa.
These two businesses aren't offering the same product. Overall, however, both businesses are offering food for the same target market—hungry people in the neighborhood.
Similarly, coffee and tea are products that indirectly compete. Both offer a morning pick-me-up, but a customer seeking one will not be satisfied with the other.
When competitors offer the same solution to the same target market, they are direct competitors.
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.
While both pizza shops may attempt to differentiate themselves from one another by offering different unique options, delivery, or order-ahead services, fundamentally both shops offer the same solution to people in the neighborhood seeking pizza (the same target market).
As another example, consider Yahoo!, Bing, and Google. Each of these products are 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, Burger King and McDonald's, and Petco and PetSmart.
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.