Understanding where you fit in the market
To figure out your ideal position in the market, think about what industry you’re in, who your competitors are, how tough the competition is and how much influence you have.
After reading the following steps, you should be well on your way to understanding your market and your position within it. You might find a great strategy that helps you stand out from the competition and improves your profit or position in the market.
Steps to tackle competition
- Step01
What type of market are you in?
A market's structure is just a way to explain competition, looking at how many businesses there are and how they interact with each other. Markets can be made up of any number of businesses. At one extreme, known as perfect competition, there are countless businesses offering similar products or services. At the other extreme, there’s just one business, a monopoly. Your market is probably somewhere in between.
- Step02
Understand who has the power
When we think of competition, we normally think of other businesses who do the same thing. They may offer bargain prices, introduce new features, or launch slick marketing campaigns. But competition could be caused by other factors – for example, the power your customers or suppliers have over your business or the threat from other new businesses entering your market.
- Step03
Work with your competitors
In some situations, working with competitors can improve your competitive position. For example, purchasing goods or services together with your competitors can lead to better buying prices, or forming a genuine joint-venture may mean you can bid for a bigger project. Whenever you work with competitors, you need to ensure you’re not engaging in anti-competitive behaviour – for example, entering into agreements on price, output or market allocation.
- Step04
Find your market position
Every business, product or service needs to have its own profile of price, performance and customisation. These define your position in the market.
As a small business, you might be more likely to grow by responding quickly to change by finding your niche.
To find your niche, you might consider:
- what your customers value
- new opportunities within your business and adding value without adding to your costs
- how to stand out from the competition.
Explain your unique selling point clearly. Write it down and use it as a slogan.
Competition is good for consumers
Competition keeps prices down and encourages businesses to innovate. This means cooperation that reduces the competition in a market is generally bad for the consumer. You’ll need to be familiar with the Commerce Commission’s fact sheet Exceptions under the Commerce Act.
Market types
Perfect competition
The idea of perfect competition doesn’t really exist in practice but it’s helpful to understand. A market has perfect competition if there are lots of businesses offering standard products or services, and customers have plenty of information to compare them.
In perfect competition, your business has little power and can’t set prices. You have to accept the going rate, because customers can easily switch to a competitor if your prices rise by even one cent above others. Generally, you want your strategy to move your business away from perfect competition, so you stand out from the competition and have more power and control.
Monopolies
A monopoly is the opposite of perfect competition. There’s just one big business, with no competition. Maybe it’s tough to set up or shut down a business – for example, it’s hard to get the necessary skills or the equipment needed is highly specialised and expensive.
This powerful business serves many customers. It can charge what it likes and make large profits. If you had the only hotel in a remote location, you’d have a monopoly.
Real-world markets
Most markets are somewhere in between the two extremes. These are two examples real-world markets.
Fragmented markets
Fragmented markets have many similar businesses offering comparable products, with little room to set unique prices — for example, cafés in New Zealand cities. Competition is high, profits are low, and few businesses have the resources to build strong brands or niches. Some businesses can expand and gain an edge.
Concentrated markets
Concentrated markets feature a few key players who closely monitor and match each other’s pricing — common in industries like floristry or car tyre services. Typically, three major competitors dominate, each with a distinct market position that allows them to set prices within their niche and focus on customer preferences. However, over-specialisation can be risky if the market shifts.
Small businesses in concentrated markets often struggle to grow without losing their niche. Still, by leading in a specific area — geographically or by product — they can act as a local monopoly, offering something others can’t match, like handmade bread in a town filled with generic options.
Competitive forces
The strongest competitive forces set how profitable an industry is. They’re the most important for a successful strategy. Good business strategy means being aware of where competition could come from, understanding who holds the power and figuring out a way of dealing with it.
Types of competitive forces
Power of customers
If your customers are only one or two big businesses that place large orders, they may be able to demand discounts or premium service. You’re particularly vulnerable if there’s nothing to stop them from buying from your competitors.
To deal with this challenge, figure out if it affects you by reviewing your customers and competitors. Find a way to make your offering unique and give your customers a reason to stay with you.
Power of suppliers
If there are only a few suppliers in your industry, they have higher power and may increase their prices or reduce supply at any time.
For example, you may buy your supplies from the same farm as your large competitor. The farm has more power over you than over your competitor. They might restrict your supply and charge you higher prices than they charge your competitor.
To deal with this challenge, you could:
- find out if they have a high degree of market power, offer unique products, or know you can’t change suppliers easily
- look for other emerging or offshore suppliers, or bring your supplier’s capability in-house
- substitute a different product that’s more easily available and meets your needs in a different way.
Threat of new entrants
New entrants to a market increase either the size of the market or the level of competition. If you run the only dairy in a growing town, you face a threat that a second dairy might arrive to satisfy the demand. New entrants may slash prices, offer new products or services or use the newest equipment.
To deal with this challenge, you could:
- try to make it difficult for new players to copy you or do things better than you
- try to negotiate the best deals and terms with your suppliers and distributors
- introduce new services that add to the unique value of your business.
Threat of substitutes
Customers could be attracted by substitute products or services that are similar to yours, even if they’re not identical.
For example, taxis, buses, private cars, and even bicycles and scooters are alternative ways to travel around a city, so they are in competition with each other. And newspapers, television, radio, and social media are alternative ways of delivering news.
To deal with this challenge, you could:
- add something unique to your product or service, something that customers value and that the substitute doesn't offer
- keep your prices attractive
- make it difficult for your customers to switch by understanding what they value.
Cooperate and compete
Small businesses often don’t have the time, skilled staff or money to do everything they need to. In some cases, you may need to cooperate with other businesses to become more competitive.
You can also pool resources. Working together doesn’t mean sharing all your business know-how. Cooperation can help everyone. Success doesn’t have to be at someone else’s expense, and you could benefit the whole industry and your customers. When cooperating with your competitors, remember your obligations under the Commerce Act.
One way to cooperate might be to pool resources together for a quality scheme, where an organisation offers certification that shows your product meets a high standard. Displaying their logo identifies you as part of the group, while letting your business remain independent.
For example, the Woolmark quality mark for wool products is funded cooperatively by thousands of wool producers. Companies with the Woolmark logo have a clear quality brand, and have more opportunity to focus on other things.
You can cooperate with businesses that are different to yours, if your products work well together, to improve your competitiveness and sales. For example, if you make tortilla chips, you could run a joint promotion with a salsa producer. If you build websites, you could partner with someone who tests them.
Use the strategy planning worksheet to identify opportunities to cooperate with other businesses.
Learn more about