Are there other businesses vying for the same sale and/or aggressively protecting their turf?
Competition can limit a new venture’s success — and your investment return. So be aware of other businesses — or the status quo — before investing.
There’s good news about the competition! More businesses are educating customers on the buying opportunity. Unfortunately, the company must convince customers that its product or service is better than the others.
You should be a bit paranoid if the company can’t readily identify competitors. It’s a big world, and there’s almost always someone else seeing the same business opportunity and trying to capture it.
If that’s the case, then it may take longer than expected to educate the customer – in other words, the “Customer Acquisition Cost” (CAC) may be high*. Most target customers tend to cling to familiar purchasing patterns, whether as a part of their lifestyle or in business. With a “new, new thing,” familiarity may be your toughest competitor.
As an example, one of our issuers had developed a product that would help a major home improvement retailer to build sales in one of its divisions. Unfortunately, the issuer hadn’t counted on sales staff reluctance to learn how to sell this “add-on” to their current line of products. Consequently, the sales cycle was extended, and unanticipated training costs increased the CAC.
There are many more aspects to competition to consider before investing in a new venture. For instance, has the entrepreneur ever competed in business? Is “coopetition” a consideration (collaboration between business competitors, in the hope of mutually beneficial results)? Again, what drives the customer’s purchase decision (price, value-add, relationship, etc.), and how does this company’s product compare to others? How is the company going to play in the ecosystem? Will its product complement other companies’ related, but not identical, services, or will it supplant and fight for a slice of the same pie?
*“To compute the cost to acquire a customer, … take [the] entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period.” For Entrepreneurs by David Skok