Every business has both direct and indirect competitors. A direct competitor is a company that offers the same primary services to the same customer base. An indirect competitor is a company that offers the same or similar services as part of a wider service offering, or that offers a good or service that can serve as a viable substitute. Both types of competitors can draw business from a company, and a good business plan should account for both types of competitors.
One of the primary differences between direct and indirect competitors is the business type. In order to be considered a direct competitor, the competing business must be in the same specific industry as the company under consideration. For example, direct competitors of a movie rental store would be other movie rental stores and rental kiosks. In addition, direct competitors serve the same customer base, so online rental establishments would be a direct competitor, even though the company may not be located in the same geography.
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Indirect competitors, on the other hand, would be stores that offer the same product or service, but not as their primary service. In the case of a movie rental store, this might include grocery stores or other retailers that include movie rental departments. Similarly, in the case of a fried chicken restaurant, this might include the prepared foods section of a grocery store.
The difference between direct and indirect competitors is not always that clear, however. Indirect competitors can also be businesses that offer a substitute for the offering of the primary company. For example, a fried chicken restaurant competes directly with other fried chicken restaurants, but it also competes indirectly with taco stands, hamburger joints and other quick-service restaurants. While the specific product offering differs, each fulfills the same basic need: fast meals at low prices.
When creating business and marketing plans, many businesses fail to account for both direct and indirect competitors, yet both can impact the success of a company. In fact, there is some evidence that indirect competitors can draw more business from a company than direct competitors. This is especially true when the competitor offers multiple offerings in the same location. For example, a customer might prefer chicken restaurant A to chicken restaurant B and would be unlikely to take business from their preferred store and give it to the less preferred store. If the same customer, however, is already shopping at a grocery store that offers acceptable chicken, the customer might purchase his chicken there rather than make a second stop.