In order to gain significant competitive advantage in your industry, you need to research your competition. By discovering the strengths and weaknesses of your competitors, you’ll be able to formulate a winning business strategy.  The in-depth study of a company’s competitors is known as a competitive analysis.

What is a competitive analysis, and why is it important?

“Competitive analysis” refers to identifying who your competitors are, figuring out their strategies, pinpointing their strengths and weaknesses, and comparing them to your own. It is important to perform a competitive analysis, because:

• It will show you how your business compares to the competition
• It will highlight any weaknesses that your competitors have
• It will help you locate any gaps in the market that you can fill to gain a competitive advantage

For example, looking at the marketing strategies a competitor uses can give hints as to the strategies you should use to achieve a competitive edge. One way to stay up to date on your competitor’s marketing efforts is by subscribing to their newsletters and carefully examining the news and updates they send you. If you notice a weakness in their efforts, or something they may not have thought of, take advantage of it and exploit it to your benefit.

The competitors you analyze should include any businesses that offer a similar product or service to a similar audience, usually in a similar geographical region. However, companies in a different area or targeting a different audience may eventually move into your turf, so it’s important to keep an eye on them, too.

How to perform a competitive analysis

Here are a few steps for conducting a competitive analysis:

1. Identify competitors through market research

To find your top competitors, conduct a thorough Google search or ask your customers which similar products or services they considered before choosing yours. Once you’ve compiled your list, make it more detailed by:

• Listing which products and services each competitor offers
• Noting the geographical area they cover
• Listing positive and negative attributes about each competitor

Now, it’s time to gather more information about how they run their businesses.

2. Gather information

Some information can be gathered from a competitor’s promotional material, including advertisements, web copy, and sales brochures.

Other information can be gathered by analyzing your competitors’ websites. When looking at websites, you can use tools like SimilarWeb to analyze web traffic data by source, and find out the keywords the competitors use to increase web traffic.

You could also consider contacting the competitor to get more information as if you were a potential customer. Opportunities to talk to competitor employees directly may also arise at trade shows, where a few questions can give you insight into the company’s business strategies.

Your own sales staff may also have a wealth of information, thanks to customers who share information about competitor services and price quotes.

3. Analyze the information

At this stage, you have information, and it’s time to analyze it and compare it to your own offering. Begin by evaluating your product’s main features and benefits, and then compare these to the competitor’s product.  Find competitor strengths and weaknesses in different areas, such as:

• Customer service standards
• Market share
• Features
• Warranties
• Price
• Distribution

Determine your position in relation to the competitor by isolating unique, desirable features that your product has – these are the key to your competitive advantage. Another important factor in using a competitive analysis is estimating your market share and the market share of your competitors.

How to estimate market share

Market share is a measure of sales performance, as a percentage, represented by the sales volume of one company compared to the market sales volume, as a whole.

A company that has a significant market share above that of the competition will define the standards for a particular product and influence the entire market.

Here are the steps to take to calculate market share:

1. Determine a period you want to examine. It can be a fiscal quarter, year or multiple years.
2. Calculate the company’s total sales over that period.
3. Find out the total sales of the industry overall during that period.
4. Divide the company’s total revenue by its industry’s total sales.

Here is the equation for calculating market share:

Market Share = Company sales in period X divided by Industry sales in period X

This works smoothly with public companies, but if you’re competitors are small or private companies you’re going to have to do a bit of digging to get to their revenue numbers. Mike Michalowicz outlines a clever way to calculate your competitor’s revenue:

1. Figure out how many full-time employees your competitor has. You can look it up on their LinkedIn company page or call their secretary and ask her to answer a short survey.
2. Multiply the total number of employees first by $125,000 and then again by $200,000.  The company revenue is probably between these two numbers. (Adjust these numbers based on the average yearly salary of where you are located)

Your greatest competition is the company with the largest market share. Knowing your market share allows you to develop a strategy with the end goal of achieving a more significant one than your competitors.

Gathering and analyzing competitor information is the best way to gain insight into the market you’re doing business in. Looking at the strategies used by successful competitors can give you direction and help you form your own strategies for business success. Focus on the unique features of your product or service to give your company an advantage over the competition.