A methodical way to improve your competitiveness
Competitiveness, or your ability to win in your chosen market, is a relative concept. How well you perform depends, in large part, on who you are up against and how your potential customers rate your offer compared to the alternatives. It is who you are the ring with that matters.
This article explains how to analyse and measure your relative competitiveness today. Which, of course, is the first step to improving it tomorrow. (You can get a free excel model that will make the analysis pretty straightforward. The link to the excel tool is at the end of the article)
Relative competitiveness in an old joke
There is an old joke you have probably heard. Or at least some variation of it. It’s the one where two lumberjacks encounter an angry grizzly bear while chopping wood in the forest. One drops to his knees and starts praying while the other slips off his work boots, pulls his sneakers out of his backpack, and slowly puts them on. ‘What are you doing, you fool’ says his friend, ‘you can’t outrun a grizzly bear’. ‘I don’t need to’ he replies, ‘I just have to outrun you’.
It is, I will grant you, a pretty timeworn joke. But it is a good example as any of the concept of relative competitiveness. As long as you are better than your closest rival you will win more often than you will lose.
If you are to make use of this concept in any practical way, we need to move on from the allegorical anecdotes and into the real world. Specifically, the three elements that drive relative competitiveness.
- What your customer cares about when deciding on a purchase
- How your customer rates you and your competitors at delivering what they care about
- How your price compares to the value you are offering v your competition
This marketing strategy stuff is really pretty uncomplicated, isn’t it? Anyway, let’s dive into the detail where I will introduce you to the devil.
Element one – What customers care about.
The first step is to understand the customer’s reasoning. Why do customers do what they do? How do they choose? Which is a simple question with no simple answer. Most of us can’t articulate the reasons for many of the things we do ourselves. To expect to completely understand another person’s motivations seems to be an exercise in futility. But that shouldn’t stop us trying.
If you knew how your customers made purchase decisions. If you could rank and weight their most important buying criteria accurately. If you were able to get inside their mind and completely understand how they went about choosing one product over another, then the world would be your bivalve mollusc. But you can’t. Not completely. Nobody can.
Customers buying decisions are complex. They are a combination of objective and subjective criteria. The tangible and the intangible. Which makes the evaluation of the buying decision somewhat difficult. Oftentimes, the customer cannot completely articulate their reasons for buying.
To add to the challenge, not all customers are alike. Different customers will have different buying criteria. Even those with the same criteria may weight the relative importance between them differently. Which is why you often need to segment your prospective customers before attempting to look at buying criteria. But market segmentation is a topic for another day.
So, there are challenges. But you won’t let these inconvenient truths get in the way of your attempt to understand your customers. You can make huge inroads into comprehending your customers buying criteria while accepting that the result will be somewhat incomplete.
It starts with a brainstorm. List as many buying criteria as you can think of. Then reduce this list to somewhere between three and six. You are looking for the most important variables that a customer will consider before making a purchase.
As an example, imagine a luxury car buyer. They will have many criteria but after a bit of research and consultation, you decide that the four most decisive buying criteria, for your offering, to this specific customer or segment, are performance, running costs, environmental impact and prestige.
Using a pairwise comparison (which is all explained in a video that comes with the spreadsheet) we create a weighted ranking of all the criteria. Which criteria are most important and to what extent? Armed with this data we move to the second stage
Element two – How do customers rate your offer v your competitors
The objective of the next step is to see how your customer rates you in delivering these individual decisive buying criteria when compared to your chosen competitors. Ideally, you will want some customer input here, but you can use the tool to generate a hypothesis before involving customers. You start by identifying two to four of your competitors.
You evaluate each buying criteria, individually, based on the customer’s perception on who is best at delivering them, between you and your selected competitors (again, all this is in the explainer video so not too much detail here). The result is a ranked and weighted list of who is best, from the customers perspective, at delivering each selected criterion. The output looks like this.
This is where we first get to see the relative competitive index score (RCI). It expresses how much better the best performing competitor is compared to the second-best in delivering on the specific customer buying criterion. So, in the fictional example above Aston Martin have an RCI of 1.08. They are 1.08 times better than Bentley. at delivering the criterion of ‘prestige’ Another way to think of this is Aston Martin are 8% better at delivering this particular criterion than Bentley, at least according to the fictional customer I invented.
For competitors not in the first place, their RCI is compared to the leader. So, Bentley has an RCI 0.93, or 93% of the leader’s score. BMW has an RCI of 0.29 or 29% of the leader’s score, and so on. When you have evaluated each buying criteria the results are consolidated into a dashboard, shown below, that illustrates your overall competitive position and a final RCI for each competitor. At the risk of being repetitive, the details of the dashboard are covered in the explainer video that comes with the spreadsheet so I will spare you the details here.
Element Three – The price they are willing to pay
I probably should have mentioned this earlier, but you never include price as part of the decisive buying criteria. Price is treated as a separate and distinct element once you have established the non-price value you are offering v your competitors. Price is a derivative of the value you offer rather than part of the offer if that makes sense. In any event, let’s talk about price.
Price is relative to two elements in a competitive market. It is relative to the value the customer perceives they are receiving and relative to the competitive alternatives the customer has to choose from. Which is what makes price optimisation a pretty complex area and one that receives too little attention.
I have developed a range of optimisation tools and models, ranging from the simple to the complex. The relative competitive index tool uses one of the simpler ones. It expresses your price and the competitors’ prices, in relative terms, and then adjusts the RCI score accordingly. This new measure is the price adjusted relative competitive index or PARCI for short.
Despite being a simple tool, the price adjustment element can give a good approximation of your price gap or price advantage. To be clear though if you want to conduct a robust price optimisation exercise you will need a good idea of your contribution margin and your price response curve. Which is yet another topic for another day.
Try It for Free
The RCI tool will help you deconstruct the elements of your competitiveness relative to your competition. It is a structured technique for analysing complex decisions. The associated spreadsheet (that you can download here) will make the calculations simple. But that is only part of the challenge. Like any analytical tool, it is the quality of the inputs that generate insights.