In this episode of Startups For The Rest Of Us, Rob and Mike talk about how to dissect your business competitors. Gaining insight can help with validating an ideas and understanding the landscape. The guys give you 8 ways to better understand your competitors.
Items mentioned in this episode:
Mike: Is that what this episode is?
Mike: I don’t know. Because it’s episode 404. Come on! Give me the nerd joke.
Rob: Oh, sorry. I totally missed the prompt.
Mike: Come on man. Alright. Theme music.
Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve built your first product or just thinking about it. I’m Mike.
Rob: And I’m the guy that doesn’t know what 404 means.
Mike: And we’re here to share our experiences to help you avoid the same mistakes that we’ve made. How are you doing this week, Rob?
Rob: I’m doing pretty good, actually. Aside from missing that bump set that you just gave me at the top of the intro there, we have wrapped up our move. Sherry and I bought a house in Minneapolis, we decided to stick around for a few years. We’ve been renting for two years. Have I gone on my rant about how buying a home is like not a good financial decision? Have I done that?
Mike: You have not done that but I have seen various people say that.
Rob: Yeah. I won’t do that here. I’ll spare everyone, maybe in an after show at some point I’ll dig into that. But I realized that sometimes you make decisions that are not the best financial but you make it more for your life, your lifestyle, or your family, or really, we wanted more control of exactly where we lived. We wanted to live right around this lake in Minneapolis called Lake Calhoun. There are just very, very few rentals here, we have lived in one for two years. It was kind of a crappy house, it was fine but the landlord didn’t do much upkeep on it, I’ll put it that way.
Really, we just wanted more control. Also, didn’t want to ever be like, “Hey, we sold the house. You guys have to move in 30 days.” you know that type of thing because we know that would have happened at the worst possible time. It wouldn’t happen when I’m totally off and not working. It would happen right in the middle of me starting a new startup or something.
Anyway, it’s all I have to say, we bought a house, we’re just one block away from where we lived before. Got the keys on a Friday, packed or showed up on Sunday, moved or showed up on Monday.
Of all the moves we’ve done, it was by far the most seamless and least stressful. It really helped neither Sherri and I really worked very much last week, and so we’re almost unpacked. We’re also motivated by our packers. They gave us two prices; one was to pack into cardboard boxes where you have all the waste and you have to get rid of it or to pack in these plastic reusable tubs that they take back and you basically just rent it for the move. The fact that you only have them for a few weeks, it was just motivational like, get those things returned and get the whole house unpacked quickly.
Mike: That’s cool. I’ve always had to move myself. I haven’t moved in more than 10 years at this point. It’s been close to 13. I don’t look forward to ever moving again. It’s one of those things where—I know at some point we’ll probably have to—but I just don’t feel like it at the moment.
Rob: It’s not fun. It’s a short-term pain for what could be a long-term gain. In our case, now that we’re in this house that’s larger, closer to the lake, we like it more, it’s newer, just all of these things. It was totally worth it but yeah, coming up to it I was just filled with anxiety, “Oh, god. This is going to be such a terrible experience,” because so many of them have been in the past. We used to move ourselves. When Sherri got the job in Fresno, they paid to move us across the country, and then obviously, Leadpages, they offered for anybody on the Drip team to move here.
Now that we’ve done it a few times and paid someone to do it, it would be hard to go back especially we have three kids. There’s a lot of moving parts in it, I can imagine. Even packing our stuff at this point will take a couple of weeks. It’s not ideal. We could obviously do it if we need to, we’ve done it before, but it really does help to reduce the stress of the move knowing that in one day they’re going to come and it was three guys showed up and in seven hours they’ve packed our whole house. It’s crazy how fast they are.
Mike: Well, because they don’t care because none of the stuff is theirs. It’s easier for them to just throw out stuff in a box because they’re not like, “Oh, I’m going to reminisce about this for a few minutes or talk to so and so, have a conversation about it.” because you’re going to procrastinate to some extent because you don’t want to move because it sucks.
Mike: They’re just going to go in, get the stuff done, get it taken cared of. They also don’t necessarily need to worry as much about like, “Oh, this item here, I want that in the new living room,” versus right now it’s in the dining room, they just throw it in a box.
Rob: Right, they just throw it in the box. To tell you the truth, the other things that made it really less stressful than it used to be—aside from the Minneapolis move—we were in Fresno for seven years, I believe. Something that’s different now is we got in this house and it’s like, “Oh, the doorbell doesn’t work. Well, I’m going to need to go get a doorbell. I need this halogen lamp that burned out in here and I’m certain it’s some specialty halogen lamp so I don’t have that. This towel rack is broken.” there’s just a bunch of stuff.
In general, the house is in great shape but there’s little things, those little things tend to bother me. I don’t have to drive all over town doing that. I jump on Amazon, I order it. I probably spent $300 in the last week on little knick-knacks and parts and things that used to be a 3-hour drive all around town to find all these things. Now, it shows up in 48 hours. It really kind of reduces the time commitment of this move because I’m able to add on an ongoing basis. Then, of course, I would have driven around, I would’ve found the halogen, come home, put it in, and the next day notice something else, so then I would’ve driven around again. It reduces the need to waste time which I think is good.
The other thing—and then I’ll stop talking about the move—is changing addresses is way easier than it used to be. Eight, ten years ago, I used to call everybody. I would have this huge list of our credit card companies and all the stuff, and I would call the 800 numbers, you wait on hold, you change the address. Now, I just went through LastPass and I looked through all of our accounts. We also have a list, there’s a few alumni associations or whatever that I don’t have accounts for but it was so much faster. It probably took me 90 minutes. I was able to do it without talking to anybody on the phone, I was listening to some music, and just hammering through different tabs in Chrome to be able to change them all. I don’t know, I think life’s a little better than it used to be.
Rob: How about you? What’s going on?
Mike: Not a lot. Just kind of keeping track of the MicroConf Europe tickets, they’re going on sale. We’ve released those to FounderCafe members and then we went out to a second round for the previous attendees for MicroConf. I think by the time this episode goes live, the next round of tickets is just going to be available. This episode go live on Tuesday and then the following is when it will go out to the early bird list. If you’re interested in meeting up with us in Croatia and 120-150 other entrepreneurs, go over to microconfeurope.com, sign-up for the mailing list. As long as you do that on Tuesday before the email goes out on Wednesday, you should be able to get into that. We’ll send out the links and you’ll be good to go.
Rob: Sounds good. It’s going to be a good time. What are we talking about today?
Mike: Today, we’re going to be talking about how to dissect your business competitors. I’ve done this—I’ll say somewhat ad hoc—over the years where I’ve been talking to somebody and the conversation would come up about who their competitors are and how big they are and how well they’re doing.
There’s some several rules of thumb that I learned from the VP of Marketing at Pedestal Software back 12-15 years ago. He basically laid out, he’s like, “Oh, well, this is how I go about doing it.” so we just got to talking and he talked about revenue, how you look at the number of employees, and all these different things. I’ve kind of had these things in my head for a while. What I did was I’ve put them down into a list and walked thru how you can go through and analyze how big a competitor is, and how much, I’ll say, strength or resources they have to bring to bear on a particular problem in their space or to turn around and crush you.
If you’re looking at a market and you’re trying to figure out, should I even go in here or not? Is there a valid business here just knowing that there is another business in that space is a good data point but knowing the specifics and being able to drill into those, it’s good to know how it is that they make their money, and how you can do it as well. Because what you don’t want to do is you don’t want to go into a market and decide to do things in a completely different way without any justification. If something is already working well, especially if it’s an entrenched competitor, they’ve been there for a while, and the industry is already used to operating in that way, then you can come in and do kind of the same thing but you have to know what the lay of the land is, how things are currently working in order to be able to make it successful for yourself.
Rob: Why is it important to do this? What are the benefits that you get from learning all these information that we’re going to talk about a competitor?
Mike: This is a way to basically go partly through the validation process. If you already have a product for example, and you want to know like, “Are there other people in an adjacent market that I could serve?” Looking at one of your competitors who already serves that market would be a good way for you to decide whether or not you should go into that. If so, how you would position yourself in the market to them. Obviously, there is low-end, there’s mid-tier, and then there’s higher-end like enterprise level sales, there’s B2B, B2C—all these different things that you can talk about or look at in terms of the business—just knowing where all of the different pieces are is going to help you figure out where to position yourself. It’s partly about market validation but it’s also about being able to position yourself in the market and explain to people why it is that they should buy from you.
Rob: Yep, that makes a lot of sense. I also think it can help you perhaps know the […] economics or the profitability potential of the business. Because if you find out the revenue is $5 million and they have 10 employees, that’s probably a very, very profitable business and easy to run. You can think to yourself, “Oh, I can do it with only 10 employees.” or, “I should keep my headcount down if I’m going to be a similar business model.” Versus if they’re at $5 million and they have 100 or 200 employees it’s like, “It’s a very labor-intensive company. Do I even want to get into this business? Or, “Are they just hiring out ahead of growth?” and you can listen to that.
If they’ve raised funding, you know how much they raised, and you know they’re at x million in revenue and these many employees, you can back-of-the-napkin calculate their burn rate, and you can back-of-the-napkin calculate when they need to start raising another round or if they’re going to run out of funding or that kind of stuff. I think the more of these things that you learn—and we’re going to talk about revenue and target customer type and other things—it just helps you get that mental map of the landscape. You don’t just do this for one competitor, you do it for four or five of your closest competitors, and you put it all up on a whiteboard or in a doc and you start to get this understanding of the landscape and how they think about things. Let’s dive into the first one.
Mike: The first one is trying to figure out how much revenue they make. There’s a couple of back-of-the-envelope calculations you can do for this and it does depend greatly on the industry. For example, with a software type business, most of those types of businesses tend to make somewhere between $150,000 and $200,000, that’s kind of like the, I’ll say, the average range but there are certainly exceptions to that. If you look around, there are companies like Apple, and I think, Balsamiq and several others that have been public about what some of their numbers. But you can get up above $200,000 in revenue per full-time employee. You have to remember that’s revenue, not profit and that’s per full-time employee.
Usually, you can do a back-of-the-envelope calculation to figure out how much money a business is making based on the number of employees they have. If it’s a software company, they probably make somewhere between $150,000 and $200,000 per employee. You say, “Okay, well, just quick math on that, $1.5 to $2 million.” That’s not exact, obviously. There’s a range there and it could also be much lower. They could be making $100,000 per employee or they could be making $250,000 or $300,000 per employee. That also depends a lot on whether or not they’re funded. We’ll talk about some of those things but just a raw calculation, that gets you in the ballpark but, it’s by no means, exact. You have to make sure you bear that in mind. It is not exact at all.
In terms of the industry, it can vary greatly from there. I have a friend who’s in the oil industry and we got to talking about this exact same topic. I kind of gave him that ballpark estimate and he’s like, “You’re off by a factor of 10.” I was like, “Well, why is that?” He’s like, “Because in the oil industry, we sell based on margins and we have to sell a lot more. Our margins are much lower. Basically, you have to multiply by 10 in order to get the revenue.” and then their profit is basically what they support their employees on. It was 9x off.
Rob: Right. Because their profit margins are so slim that they have to make a way more revenue. That’s the thing, we should probably stick to online businesses when talking about this, bringing up the oil example is fine but we should clarify that we’re really talking about startups. Even physical e-commerce is tough because I know someone who runs a $2 million or $3 million e-commerce business but the net margin on that is 10-15%. You can imagine, they couldn’t support 30 employees on that because you just don’t make enough. I think we’re talking more about software companies.
Mike: Yep, I agree. I brought up the oil example just to point out that when you get into physical goods, like with software, your profit margins tend to be 90% or upwards of 90% but with something like selling oil, for example, you sell oil at $2 per gallon, your actual profit on that is only ¢10 or ¢20. That ¢10 or ¢20 is what comes back into your business and you can use that to support your employees. That’s why my back-of-the-envelope calculation was so far off by a magnitude of 10 when I was talking to that guy who’s an executive in the oil company.
Just keep in mind, physical production costs really eat into that, and your revenue will be substantially higher or their revenue will be substantially higher because of that but it doesn’t necessarily translate to profit and […].
Rob: Yeah. This is the formula, the 100k-200k per employee that I use in my head just when I ballpark things. As you said, there can be outliers. You can have some startups will be five people and they’re doing $5 million or $10 million, and they’re super profitable. Then others that have raised funding are the exact opposite. They’re doing 200k in ARR–Annual Recurring Revenue and they have 20 employees because they’ve staffed up. It can be skewed but this is for a—when I think of it—it’s like a bootstrapped and profitable or even funded but kind of well-run and capital efficient company, I think this is a reasonable number. If someone is growing really fast, this number can get skewed in one direction or another. As you said in the outline here, you have early-stage or pre-employees where it’s just founders, it’s pretty much guesswork. Unless, you hear them comment in a podcast, or in a blog post, or they posted it live on Baremetrics or something, it’s just pure guesswork at that point.
Mike: The second thing to look at is their target customer type. To do this, you can look at their pricing and specifically who they are targeting. By who they are targeting, there’s two different classifications. Generally, it’s either B2B or B2C, and within B2B, there’s several different levels; there’s the high-end enterprise, there’s the small-medium business market, and then there’s the professionals, so freelancers, various small agencies, or partnerships–things like that. I would throw prosumers in there as well. Those are people who are professional freelancers but maybe they do it on the side or it’s something that they are interested in but they don’t necessarily gain their full time living from it.
Then B2C, it’s something like a mass market where you’re trying to sell one of every single thing to every person on the planet. Then there’s well-off individuals or trying to sell the families or pro-hobbyists sort of prosumers. Those are the two general classifications; B2B and B2C and then within each of those you have to also be aware of what type of customer they’re selling to. That’s mostly a function of price but again, it depends on what it is they’re selling, whether it’s a software, or digital asset, or a physical product.
Rob: I think pricing is a big indicator here and then just with their marketing–look at their headlines, look at their copy, look at their colors and their design. I was thinking, what’s a mobile phone company that really caters to the youth these days? They’re going to have a different logo. Is Boost Mobile still around or am I totally dating myself?
Mike: I don’t know. I don’t think so. I think they’re part of, I don’t know, the one with the purple logo.
Rob: Yeah, exactly. This is great radio here. Sorry folks. Some brand like that that’s targeting kids in college is going to have a very different language and very different logo than salesforce.com–that’s B2B enterprise, all that stuff. You can get a feel from that if they’re positioning themselves well and then price, of course, is a big deal.
When I was first trying to figure out pricing for Drip and I was really agonizing over it. I went out to all the competitors that I knew about and I put it all in a single doc of what everyone’s pricing was. All the grids and I was just trying to analyze it. It really helped me get a feel for where we should land that as a new startup that’s launching. Of course, pricing is tough, it’s always a lot of guesswork but it gave me a really clear picture of again, the landscape.
What was interesting is that I returned back to that doc every six months or so, and so many of the prices were just dramatically different. The people had different tier levels, some had raised prices, some had lowered prices, some had raised them on the low-end, lowered them on a high-end. It was really interesting to watch that over time. I updated it a few times and did a snapshot over time but it is fascinating if you watch competitors and make it, every 60 days or every 3 or 4 months, go into this group and whether you have a VA do it or do it yourself, then just take another snapshot of their pricing and you can watch how stuff shifts over time in a space.
Mike: The next thing to look at is what their sales and acquisition channels are. There’s a few different categories. Obviously, there’s online which includes either website, their content marketing, advertising, email list, etc, and then there’s offline channels which are much, much more difficult to find and analyze the effectiveness of. The things like trade shows, physical mailings, relationships and partnerships that they’re leveraging, if they have a brick and mortar store, there’s obviously heavy infrastructure cost and logistical cost of just getting products to those.
Again, we’re probably going to lean away from the physical product side of things but you can imagine that with offline channel such as a trade show, how do you know how many customers they’re getting in contact with, or what their cost to acquire those customers. You can guess based on what it costs to attend the trade show. You could go to some of them, like a competitor, let’s say they go to trade show x and you go to trade show x and say, “Hey, can I see your sponsorship rate card?” You look through that, figure out what sponsorship level they went in on and then figure out how many people they probably sent. If you are at the trade show then it makes obviously, that easier because you can just go up to those people and ask them questions. But you can get a sense of what their marketing budget is like based on some of the different things that they do.
Obviously, trade shows are easier to calculate but if they’re doing physical mailings, it’s really hard to get any insight there because you don’t know how they’re getting their list, what they’re paying for it, or the effectiveness of it. All that stuff is going to be, very much siloed inside their company. It’s going to be much harder for you to figure out, not just how much money they’re spending on it, but whether or not it’s effective.
Rob: You know, one way to also get an idea is to use an online tool to look at your competitors’ keywords that they rank for, to look at ads they’ve run or are running. There are tools like Spyfu and ahrefs.com which you can type in a competitor website and it’ll give you a good idea of what they rank for, and what the terms are, and how much traffic potentially. It’s all estimates but it gives you some idea.
Then, just to get an idea of their top-level traffic like, “How many uniques do we think they get?” I used to go to compete.com but that shut down and so now, I’ve really been using rank2traffic.com. There is another one—I can’t think off the top of my head—but what I did is I searched for compete.com competitors or replacements and there’s actually a Quora thread where folks named a bunch of them and I tried 10 of them, and Rank2Traffic and another one was I felt like had at least the best guesses.
Again, these can be off by a factor of two or three in either direction. It is a bummer but at least it gives you some idea. Sometimes you’ll put in a competitor and it’ll just say, “Not enough traffic to list here.” It’s like, “Oh, they’re probably getting less than 5000 uniques.” That’s not a major channel for them most likely.
Mike: The next thing to look at is the type of products they’re offering. We’re going to neglect the physical product side of the equation and focus on digital products. But even within digital products, you’ve got things like software, you’ve got courses, all sorts of things that fall under that digital category. There’s going to be support costs differences for them, and engineering, and research and development costs that are radically different.
If you have a course, for example, the support cost on that is way, way less than they are for a software product. Just because with software products, you have to train and educate people versus a course that is the whole goal of it.
In addition with most software products, you’re going to have to offer some sort of ongoing support. If it’s a SaaS application, that is a monthly ongoing support that you’re offering but with training courses, if there’s a bug or a problem in it, you typically fix it and roll out the new version to everybody and that’s it. You don’t have to continually update it–at least in terms of fixing things inside that. It doesn’t mean you can’t offer a new version of it or an updated version for 2018 versus 2016 but the length of the time that you’re going to be spending doing support and offering any sort of warranties or bug fixes or anything like that is dramatically lower for a course than it is for a SaaS product.
Rob: Another thing that you can look at is the length of time they’ve been in business. Older businesses do tend to be more stable without massive revenue fluctuations, they also tend to be in the software space slower. They’re slower to release features. There’s a lot of opportunity when competing against older businesses that have gotten kind of big and bloated.
Newer businesses can obviously have a lot more revenue swings or faster revenue growth in terms of percentage wise, but they can be harder competitors for you to compete against because a lot of times, if you’re just a team of one, two, three people, your advantage is that you can move quickly and you can take refugees from those older, larger companies. I think there’s a lot of opportunity. It was the playbook of Drip–that we were the young upstart, and we were smaller but we were shipping features so much faster than a lot of our competitors. It was kind of easy pickings against companies that had been around for 10 years and had a bunch of legacy.
That’s the thing with oil companies, or paper manufacturing–kind of typical brick and mortar businesses. If you’re 50 years old or 100 years old, you have a brand name, you can be entrenched in a space but if you’re a software company that’s 10 or 15 years old, you are very likely to have a ton of legacy code, and your software is very likely to not be as good as software that was built today. It is this kind of inverse thing where, older companies will have a lot of revenue, and they have a lot of momentum and they’ll have a lot of brand, there tends to be a pretty good factor to get in there as an upstart and make some traction.
Mike: Just to kind of tackle on or clarify a little bit of what Rob is saying because I don’t want people to misunderstand him based on exactly what he said. But when he said that the new businesses tend to have a better code, it’s not like the ones and zeroes are any better, it’s really just that they have basically, honed in on exactly what it is the customer wants in terms of the minimum stuff that needs to be built versus the businesses that have been around for a long time.
It’s just so much harder for them to make a change even if it would be better for their customers because they have to take into consideration the existing customer base. If they make a large change to the frontend of their product and they suddenly alienate 30,000 customers, it’s really bad for them. That’s just going to make massive problems for them and support headaches. They’re going to choose to not make those changes even though they could and they have the resources to.
Rob: Yeah, that’s right. There’s legacy customer stuff. That’s what you’re talking about if you can’t make a change, and then there’s legacy code stuff. When I think of how much better software development practices have gotten over the past 15 years with extensive unit testing, the frontend integration testing, and the agile development methodologies–the software I was writing and working on 15 years ago was harder to maintain. Maybe that’s not across the board and maybe that’s not for everyone, but that software, we could not ship features nearly as fast because the software didn’t have unit tests and it was more crafty–it was all these things. These days I believe the practices, they’ve gotten better. I think software these days is easier to work on assuming that you have knowledgeable people who are using the right engineering practices and aren’t just hackers throwing stuff at the wall on a weekend or something.
Mike: The next thing you look at is the company leadership and how that is structured. If they’re self-funded, the founders tend to be in those company leadership positions. If it’s angel or VC funded, the founders may be there still in the executive capacity or they may have put into more of a director role and they brought in professional CTOs or CEOs, for example. It depends on how far along they are.
If it’s a established business that’s been around for 10, 15, 20 years then who knows what that looks like but it also gives you an indication of what things are going to change in the future. They just brought in a new CEO or they just got a round of funding, for example, that dramatically changes what the future vision for the company is going to look like.
Those are just, again, just data points that you can look at but it helps you to understand how quickly is this company going to change direction and are they likely to change direction? If the company’s been doing their business exactly the same way for the past five years, chances are good they’re probably going to do that for at least the next year or two but there’s no guarantee.
Rob: You can go to Crunchbase for this. You can signup for Google alerts on the company names. I think that’s a good idea anyways. One thing I’ll caution as we’re talking through this is, I have been in environments where people were way too fixated on what are competitors are doing. “Oh, they just shipped this thing. Oh, they just raised this round of funding.” I was like, “This stuff is good to know but this is not make or break. You should be focusing way more on your customers than on your competitors.” With that said, everything we’re talking about here is still good to know, to have an idea of the landscape, and to revisit it every—I would say in a startup environment—probably every month to three months if you’re in the early stage. But this is not something that everyday you should just be thinking about and trying to look and watch competitors and watch what they do because it just matters so much less. Unless you’re in a neck and neck race with your competitor, it’s just not a good thing to be overly fixated on what other people are doing.
I think another thing to look at is red flags or exceptions. These indicate potential problems or major changes that could be good or bad that a competitor is doing. If you hear about layoffs they’re doing, if there’s a quick change of leadership where the CEO was perhaps, asked to leave–anytime there’s a change of leadership you always wonder what happened; if they raised funding recently, they have new product announcements, all kinds of stuff. This is where you can again, monitor the email list, there’s people talking about any industry. If you’re in marketing automation and then there’s three or four people who are kind of the industry experts that you can be on their list or you can like I said, subscribe to Crunchbase updates or do Google alerts just to hear about what your competitors are up to.
Mike: The last thing you can look at to dissect your business competitors is to pose as a customer and try and find out how they treat their customers. There’s obviously some ethical questions that you have to answer for yourself here in terms of how far you’re going to go. Obviously, you can sign-up for a competitor’s products, you could just get on their mailing list, you could call or email their support and directly ask questions.
Posing as a customer gets a little dicey of course in terms of ethics and how far you want to go with that but each person has their own, I’ll say, line in the sand for that. Personally, I don’t think that I would go too far with that. I might look at their email list. What I don’t know is I would sign-up for a trial if I wasn’t actually interested in it though. But all of these gives you an idea of how they treat their customers and whether or not there are ways that you can position yourself to customers that are unhappy with their product or their service in order to make yourself more attractive to those customers that are leaving.
Rob: To recap, we had eight way to dissect your business competitors.the first was, look at their revenue. Second was target customer type. Third was sales and acquisition channels. Fourth was software versus courses. Fifth was length of time in business. Next was company leadership, then red flags and exceptions. Eight one was posing as a customer.
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