Good competitors and Bad Competitors

Written: 2016-12-01

I remember that, whilst on “holiday” in Egypt lying on a sun lounger, I was reading a Peter Drucker book. Amongst many subjects, he talked about good competitors and bad competitors.

Whilst competing in business, the natural inclination is to assume all competitors are “bad” competitors and to aggressively attempt to miniaturise their market share as rapidly as possible (maybe even to bankruptcy). To become the only player in the market with extremely aggressive marketing.

After reading this idea, I couldn’t stop filling up my notebook with ideas on how this could improve my own business. It was a true lightbulb moment. I could barely sleep for days (I’ll talk about business induced insomnia later in this blog) thinking of ways I would apply this.

It became an almost pivotal change in strategy: To let the good guys thrive and do some of the legwork to increase the market size. I classed a “good” competitor who is 1) spending on advertising, 2) not as good as my own business (traffic and conversion) 3), not undercutting prices driving down margins, 4) not intentionally pushing up PPC prices reducing market-wide profits.

“Bad” competitors would be those who could only gain an advantage by undercutting prices or through false litigation or disparaging comments to suppliers. I operated in a cut-throat market selling identical google-able SKUs. These competitors needed to be removed. And with time, removed they mostly were.

I learnt that the presence of good competitors, in fact, adds to the removal of the bad guys, not subtracts. So, the decision was to no longer attack good competitors, thereby allowing a market with 2 – 4 “good” competitors who are all profitable to an extent, but whose profitability could be controlled. The balance of competitor placement (sale and profit) and market share could then be carefully controlled with ad spend and conversion rate optimisation. I stopped trying to PPC outbid them and concentrate on price parity and converting customers. The result is greater profit and revenue in the long term (at the sacrifice of short-term loss).

The bad competitors found their own death because undercutting prices made them look less believable and trustworthy to the few customers who could find them (their marketing spending power was less due to smaller margins from the undercutting). They also lost credibility with suppliers by damaging the market’s margins. While they existed, they still played a minor role in making my business look more credible.

This also increased the barriers to market entry by way of market saturation (there are, of course, only a few who can rank above the fold in Google). Once the main good competitors were allowed to thrive, new entrants were unable to gain supply from manufacturers as they already “had enough good vendors”.

Maybe this idea could have been learned prior to starting a business and that there is some merit to business education after all (I was always self-taught), but if I studied this in university would this have really set into my mind until I was in to a war zone one? I believe not.