Any competition drags down margins. Fighting for customers always leads to price/margin cutting. The only way to maintain high margins is to preemptively move to new and better markets before the competition gets intense.
There are three types of competitors: good, bad, and indirect.
Most competitors are good competitors. They act ethically, focus on marketing their own products without destroying yours, and act with long-term focus to maintain a healthy market for you both. You can build a good business in the face of good competition and even maintain a good relationship with your competitors.
Bad competitors can make your life miserable and ruin your business model. Building a great business in the face of bad competition is difficult or impossible. Bad competitors fall into two categories: unethical and dumb.
Engage in unfair business practices.
Engage in predatory pricing practices.
Sell items below cost for extended time periods.
Attempt to unduly influence government officials.
Exhibit monopolistic behavior.
Engage in illegal practices, such as operating in violation of health and safety codes, hiring undocumented workers, toxic waste dumping, or paying less than minimum wage.
Engage in pay-per-click fraud or post negative information on public sites like Wikipedia.
Lower prices below sustainable levels to gain volume.
Bad-mouth competition, hoping to gain business.
Sell excess inventory to distributors to boost short-term sales (channel inventory).
Sell against the competition instead of standing on their own product’s merits (think politicians).
Continue to pour organizational time and effort into overcrowded markets.
Continue fighting even after the battle is lost.
Employ poor sales techniques, like simply lowering prices, rather than looking for ways to add value.
Are bad at accounting. You’ve met these types before. It takes X amount of business to reinvest in equipment, R&D, training, and overhead. Yet these types ignore the reality of accounting for all overheads, or set aside provisions to cover the long-term cost of being in business and wind up selling products barely above marginal cost.
Yes, they’ll go out of business eventually, but when and at what cost to you? It’s best to help these competitors go out of business faster or to run from them.
Stay away from markets with bad competition. Dumb competitors rarely turn smart. If you started in a market with good competition but find the market now has bad competition, find a way to exit the market. Bad competition only leads to a war of attrition that no one wins and after the market has been damaged, it’s a very hard place to come back from and make money.
Everyone has competition. You may be lucky enough to have no direct competitors in your niche, but everyone has indirect competition. Examples of indirect competition include the following:
Gas stations compete with other gas stations but also with natural gas or electric vehicles.
Gas stations also compete with alternative modes of transport, such as walking or bicycling.
Gas stations also compete with non-consumption — simply not driving at all.