Direct vs. Indirect Competitor – The Difference

As the name implies, direct competitors are those who compete with you in a one-to-one capacity.

They offer essentially the same solution to a customer’s problem that you do.

Indirect competitors offer alternative solutions to the same problem.

Their products could be very similar to yours or not similar at all. The important part is that a customer could choose them as an alternative to you.

Example: 2 Pizza Shops

Two pizza shops in the same neighborhood are direct competitors.

They both offer a solution to their customers’ problems—hungry people need food—but more than that, they offer the same solution.

Pizza isn’t the only thing hungry people can eat, though. If there is also a sandwich shop and a sushi bar in the same neighborhood, then those establishments are indirect competitors of the pizza shops.

They offer a solution to the same problem, but their solution is different. You also have to account for substitute products.

What about grocery stores?

They too sell a solution to the problem that hungry people face. A family that chooses to eat a home-cooked meal made from ingredients purchased at a grocery store, or a dieter who skips lunch, have both chosen a competing offer as a solution to their problem instead of purchasing a pizza.

Another way to think of direct and indirect competition is that direct competitors compete by offering the same or similar products, and indirect competitors compete by offering different things to the same market.

The competition that exists between different industrial actors is just one kind of competitive pressure that is felt by companies, however.

The pressures that customers, suppliers, and substitute products exert on the industry are very real and very powerful competitive forces that are often overlooked.

A deep dive into Porter’s Five Forces model, a helpful framework for understanding the relationships between various forms of competition within an industry, follows here.

When you constructed your customer avatar in the market analysis section, I encouraged you to start with the problem you were solving for customers, which is the essence of why they will consider buying your product at all.

Now that you have identified your industry and competitors, you need to think long and hard about how you are differentiating your product from what they are offering.

Customers buy benefits, not features, so be sure you are differentiating your product on that basis.

Also, remember that it’s very hard to get customers to change their behavior and buy a new product, so your points of differentiation need to be compelling to your target market segment.

Example:

competitor-analysis-example

Beer is an adult beverage that is popular all around the world, to understate the obvious.

Although the overall market is huge, there are also an enormous number of competitors, many of whom are gargantuan multinational corporations with billions in annual sales.

Nonetheless, smaller craft breweries are able to enter the market and thrive.

Some do so by segmenting their market geographically and staying local, but the ones who become national brands do so by differentiating their products from the larger competitors in ways that are meaningful to their target customers and are not easily imitable by their larger competitors.

Some common points of differentiation:

  • Authenticity – Craft breweries tout their local roots and ties to the community in many different ways
  • Quality – Fresh, local ingredients, longer and more complicated brewing and aging processes, and highly skilled brewmasters
  • Specialized Niches  – Smaller craft breweries can experiment with unique or seasonal ingredients to produce an endless variety of interesting and one-of-a-kind products