What is competition in business?

Competition in business is the contest between several firms selling similar goods or services. Different
companies attempt to meet the same consumer needs with their version of a product and, when
successful, earn more revenue as people choose to buy their offering. Competitive business
environments demand that each firm attempt to address consumers' concerns, such as product quality,
price, and functionality. These pressures generally result in companies producing innovative products
and attempting to offer lower prices, directly benefiting the consumer.

Direct vs. indirect vs. replacement competition types

There are three primary types of competition, and identifying competitors of each kind can grant you a
more comprehensive understanding of your market's landscape:

Direct competition: Direct competitors offer a product addressing a near equivalent consumer need. For
example, two brands selling dual-sided kitchen sponges are direct competitors.

Indirect competition: An indirect competitor sells the same product but with different aims. An
accounting firm that works primarily with small businesses might be an indirect competitor to a major
accounting firm serving large corporations.

Replacement competition: Replacement competitors sell products that differ from yours but could
threaten to replace the consumer's need for your product. For example, a company producing e-readers
and tablets is a replacement competitor for booksellers, because customers can read e-books on these
devices, potentially reducing the demand for print books.

Why is competition in business important?

Typically, consumers view competition in business as primarily beneficial to them, since they can buy
new products at better prices. Competition also leads to several key benefits for businesses themselves,
such as:

Lower operational costs

Businesses produce goods and services, but they're also major consumers, often purchasing a broad
array of goods and services to operate. Just as consumers benefit from multiple firms attempting to earn
their business, businesses also benefit from being able to shop between multiple service providers and
vendors. Responsibly operating a business involves constantly looking for opportunities to cut costs by
sourcing materials and services more cheaply. Competition also affects operational costs such as rent.
Landlords and property management companies often keep rents lower to keep tenants in their
locations.

Better quality materials and services

Businesses benefit from other firms competing to offer them the highest quality materials and services.
Since these firms understand their clients require excellent resources to compete in their respective
markets, they continuously try to impress them by being reliable suppliers and vendors. Having access to
better materials and resources might help your team produce a higher-quality product. For instance,
different seafood purveyors constantly approach chefs with their finest quality fish, hoping to earn their
business. Chefs depend on access to these exceptional ingredients to create menus better than other
restaurants can offer.

Greater efficiency

In response to competition, organizations often experience greater efficiency. Inside an organization, the
need to be more productive guides companies as they review their processes for inefficiencies,
implementing improvements that boost profitability wherever possible. Externally, the vendors they
purchase from continue to streamline their services so that it's easier to do business.

For instance, car companies look to increase efficiency by analyzing their production processes, vehicle
designs, and employees' abilities. As they improve these operational areas, they make more cars in less
time and can often offer consumers a better product. The vendors that provide them components also
compete, trying to quickly and reliably deliver goods in greater quantities, directly supporting the
companies' efforts to increase productivity and profit.

More consumer spending

When competition drives prices down, consumers have more disposable income. This creates a greater
opportunity for businesses to enter markets and earn a share of consumer spending. For instance, when
someone shops for groceries with a fixed budget, the less each item costs, the more products the person
can buy.

Because competition results in so many product choices, consumers appreciate it when a company offers
an exceptional one. This positive consumer sentiment can directly translate to increased demand,
encouraging people to make purchases. For instance, to remain competitive, shoe companies constantly
release new editions of their sneaker. When a particular design achieves significant popularity, shoppers
may decide to take part in the trend even if they already have enough shoes.

How to manage competition in business

If you work in marketing, business development or management, it's important to understand how to
use competition to grow the company. Here are the steps to take to ensure the business remains
competitive with other firms in the market:

1. Research other firms in your market

To be competitive in your market requires understanding the differences between the company and
other firms. This involves comparing the details of the business models and the differences between its
products from the consumer's perspective.

Learn about the other businesses or firms in your market to better compete with them in the future. It
might be beneficial to perform a competitor analysis on some of your most significant competitors. If
your competitors make a similar product as you using more efficient production processes, you benefit
from analyzing how you can adjust the business model to achieve a similar level of profitability. If a
competitor offers lower prices than you, you might attempt to sell at their price point, or you might
justify your price with a superior product.

2. Profile your ideal consumer

Data-driven marketing enables companies to create increasingly specific consumer profiles. Therefore,
many organizations' successes depend on marketing efficiently to a targeted audience rather than
broadly. To learn about your ideal consumer, consider conducting surveys, hosting focus groups or
exploring social media to see what characteristics define the people who buy products like yours. Once
you know who's most likely to purchase your unique goods or services, you can structure your marketing
efforts and branding accordingly.

For example, a furniture company might recognize that its designs appeal to college-educated people in
their 20s and 30s. If the company wants to embrace this demographic's values, it might emphasize using
responsibly sourced wood so that its products align even better with its core audience.

3. Define the brand

When comparing products, consumers often make assumptions depending on their understanding of the
brands that make them. This process depends on consumers responding to the messages brands
advertise and developing strong associations with them. For instance, many winter coats keep people
warm, but when buying one, consumers might first shop with brands that match their interests like
snowboarding, fashion, or hiking.

Try to align the brand image with your target demographic's values and interests. Doing so can help you
market effectively and develop meaningful connections with your customers. The more distinct the
brand the more you might distinguish the company from its competitors. You could also limit your
exposure to competition by representing identities and groups that other companies may ignore.

4. Emphasize your difference

Comparison largely drives the purchasing process. Consumers compare price, product quality, and
customer experience to decide which business to support. To compete successfully, you benefit from
making it easy for shoppers to understand what's unique about your good or service. You might review
your product packaging, sales tactics, or marketing efforts to confirm your product's advantages are
clear, or you might recognize a need to improve your good or service so that it outperforms competitors'
offerings. Consider what makes the business different from the competition and emphasize this to
customers.

5. Focus on customer service and experience

When consumers have an excellent shopping experience or receive great customer service, they often
become loyal to a company. Since repeat customers are often critical to businesses' bottom line,
cultivating them enables you to earn and keep more market share. If consumers know they can trust you
to treat them well, they may choose you over competitors and encourage people in their social networks
to do the same. Ultimately, direct the company's efforts toward superior customer service and
experience to encourage customers to make repeat purchases.

6. Continue to develop your product

Businesses often introduce products or services that succeed at first but become less valuable as
technology advances or as other competitors offer improved products. Counteracting these realities of
competition requires you to continue developing your product so that you can build on your original
innovations and create new ones. Striving to give consumers a better product also reflects well on the
brand, showing its commitment to meeting customer needs as the company receives feedback and
applies new insights. Look for ways to develop your product offerings to show customers your
continuous ability to meet their needs.

7. Emphasize employee satisfaction

All the processes involved in remaining competitive, such as research, marketing and customer service,
depend on talented individuals dedicating their skills to the company. When your team remains stable
and grows smoothly, you can focus on innovating and refining your operation instead of constantly
recruiting and training new hires. Reducing churn and nurturing a positive work environment could help
an organization excel against its competitors.

It might be beneficial for managers to create a safe and enjoyable workplace where team members feel
they can advance their careers. By keeping employees satisfied, you also lessen the likelihood of them
leaving and transferring their value to your competitors. Some businesses choose to ask employees to
sign a non-compete agreement, which legally obligates them to keep company information private if
they start work for a competitor.

Examples of competition in business

Below are two examples of how competition in business might occur:

Direct competition

Below is an example of direct competition:

JD Harstein Jewelers sells luxury jewelry like diamonds, rubies, gold, silver, and pearls. It specializes in
engagement and wedding jewelry for shoppers with a high budget. Brineman Luxury Accessories also
sells high-end jewelry made of precious stones and metals. The team typically targets those shopping for
engagement and wedding jewelry at a high price point, too. Since both companies sell the same types of
items at a similar price, they might compete by trying to offer rarer products and a more personalized
shopping experience.

Indirect competition

Here's an example of indirect competition:

Bluebird Song Coffee is a cafe serving coffee, tea, pastries, and sandwiches. It showcases art by local
artists and has seasonal menus before experimental drinks. Dice and Caffeine Cafe is a nearby cafe
where guests can play board games while they enjoy their drinks. The entire restaurant has thematic
decor celebrating gaming and it hosts regular events for gaming groups. While both companies are cafes
selling coffee, they have a different goals in doing so and use different resources to create a unique
environment.