What does it mean to have a competitive advantage?
There are several technical definitions, but ultimately a competitive advantage is the reason that customers choose you over your competitor. When customers buy products and services, they always want to get the most for their money, and if they feel like your business gives them more than if they went to your competitor they will buy from you.
What Does It Take To Win?
Here’s another way to look at it. In sports the championship always goes to the winning team. But what separates the winning team from all the other competitors? They play by the same rules, they have the same goals, they work just as hard, but for some reason there are winning teams and then there is everybody else. The winning teams have a competitive advantage. They have something that sets them apart from everyone else that allows them to win.
Competitive Advantage Is Rarely Obvious
The trick is to correctly identify the competitive advantage and make sure it is really a strong competitive advantage. However, in business, just like in sports, competitive advantage is rarely obvious. It doesn’t stand out and can be very difficult to identify. Let me give you an example. Most entrepreneurs will think that low price is a competitive advantage. It’s not. Setting your price too low can put you out of business. Here’s why. If you have a lower price than your competition, but have a higher cost structure – meaning it costs you more to sell your products or services, then instead of a competitive advantage you actually have lower margins, which creates a disadvantage for your business. Another example of low price that can hurt your business rather than improve your competitive advantage is in perceived value. If you price your product too low the impression in the marketplace will be that you also have poor quality. It’s the old adage, “you get what you pay for” and if I’m not paying enough I think I’m not getting enough either. It creates a cheap product in the customer’s mind, not a great deal.
We’re just using low price as an example. There are many different ways to have a competitive advantage and there are many businesses that are able to offer a lower price because of their competitive advantage. But it’s not their low price that is the competitive advantage. It’s something else that creates the opportunity for them to offer a lower price or maybe it’s their competitive advantage that enables them to offer better quality or service or that they have a unique process.
What Sets You Apart?
There are several ways a business can have a competitive advantage but too often entrepreneurs don’t know how to plan for a competitive advantage. They either are too broad in their approach or too narrow. Trying to be the best at everything won’t work and not knowing where you can be the best will never get you customers.
You need to focus on a couple areas in your business and become the best in those areas of focus to have a strong competitive advantage.
18 Areas your business may have a competitive advantage?
- Do we have Intellectual Property Rights?
- Do we have a Unique Trade Secret?
- Do we have a Better or More Efficient Process?
- Do we have a Distinct Cost Advantage?
- Do we have a Better Distribution System?
- Do we have a Human Capital Advantage?
- Do we have a Better Location?
- Do we have Better Access to Markets?
- Do we have Better Suppliers?
- Do we Benefit from Government, Tax, or Legal Advantages?
- Do we Operate in a More Favorable Environment?
- Do we have Better Access to Capital?
- Do we have a Superior Reputation or Brand?
- Do we Create More "Buzz", are more people talking about us?
- Do we have a Better Market Position?
- Do we have Limited Competition?
- Do we offer a Better Solution to a Problem?
- Do we have Access to Better Information or Data?
If you have a specific cost advantage or the ability to sell at a higher volume, then you might have an advantage that allows you to offer a better price.
Maybe you have intellectual property rights, or a better location, or a better expertise. If so you might have an advantage of better quality for your customers.
Perhaps you are more innovative in your approach or are able to develop new products in the market. If so your advantage might be that you are a market leader.
There are many ways to create a competitive advantage. Go through our list of your possible areas for competitive advantage and see where you might have the biggest opportunity to create your competitive advantage.