Types of competitors, with examples from 3 industries

There are five types of competitors: direct (same product, same customer), indirect (a different product for the same need), substitute or replacement (a different way of making the need go away), budget (anything after the same money) and potential (someone who could enter). Most businesses only track the first, which is why the examples of competitors that end up hurting them usually come from the other four.

The five types

Direct competitors. Same product, same customer, similar price. The café across the road. These are the direct competitors you already know by name.

Indirect competitors. A different product that meets the same need. The supermarket meal deal competes with the sandwich shop. How they differ from direct rivals, and why they matter more than people expect, is on the indirect competitors page.

Substitute or replacement competitors. Something that removes the need for your category altogether, often arriving from outside your industry. Smartphones replaced most standalone sat navs, compact cameras and MP3 players without competing on any of those products' terms. Porter treated this as a separate force, the threat of substitutes.

Budget competitors. Anything competing for the same pot of money or time. A $1,200 conference ticket, a $1,200 online course and a week of a freelancer's time are three unrelated products fighting over one training budget.

Potential competitors. Businesses that could enter your market but have not yet. The usual suspects are a supplier who could sell direct, a customer who could bring the work in house, an adjacent business adding your service, and a large platform bundling your product into something people already pay for.

Examples of competitors in three industries

The same five types look very different depending on what you sell.

Two things stand out when you fill in a table like this for your own business.

First, the bottom three rows are where the surprises come from. Nobody at a coffee shop loses sleep over the office coffee machine until the biggest employer nearby installs one.

Second, the "indirect" and "substitute" rows are often the reason a price feels wrong. Customers do not compare your $300 a month bookkeeping service with another firm's $280. They compare it with $30 of software and an evening of their own time.

How this maps to Kotler's four levels

If you studied marketing you may have met Philip Kotler's four levels of competition instead.

• Brand competition is roughly direct: similar products at similar prices to the same customers.
• Industry competition widens that to everyone making the same class of product.
• Form competition covers products that deliver the same benefit in a different form, close to indirect and substitute.
• Generic competition is everything competing for the same spending, the budget type above.

Potential competitors have no level of their own in that scheme, which is the main reason the five-type version is more useful for monitoring.

Which types to watch, and how often

You cannot watch every name in the table above with the same care, and you should not try.

Direct: weekly. Their prices, offers, ads and new pages change your conversion rate this month. Three to five names is enough.

Indirect and substitute: quarterly. They rarely change week to week, but when they do, they change the category. Search your customer's problem rather than your product name and see what comes up.

Budget: once a year, when you set prices. Ask what else your price buys your customer, and whether you would choose you.

Potential: watch for signals, not names. New advertisers appearing in the ad libraries for your terms, new domains ranking on page one, a supplier hiring ecommerce staff. The threat of new entrants page lists the early signs.

The mistakes that make the list useless

Listing only direct rivals. It feels thorough and misses the three rows where most category change happens.

Treating types as permanent. A bakery that installs a proper espresso machine and a few tables has just moved from indirect to direct for the café next door. Re-sort the list every six months.

Giving every name equal attention. Twenty names watched badly is worse than four watched well. The guide to finding your real competitors shows how to narrow the list to the ones you actually lose to.