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.
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.