In the grand theater of ecommerce, competition takes center stage, keeping the audience on the edge of their seats. But not every performance is a heart-pounding Shakespearean tragedy. Each business has its unique script, stage, and actors, and the intensity of rivalry among competitors can vary dramatically.
Today, we will explore the competitive dynamics of the business world, with a special focus on the ecommerce world. For the business strategy nerds out there, we’ll delve into Porter’s analysis of the intensity of rivalry and apply it to online businesses. We’ll review the key factors that impact the intensity of rivalry before looking at strategies to successfully navigate a competitive environment. So, let’s dive in and discover what keeps our audience applauding.
Which factors affect the industry intensity of rivalry in the ecommerce world?
The intensity of rivalry in an industry depends on several factors, some of them being more relevant in the online space than in brick-and-mortar retail. Let’s take a look at the main factors influencing the intensity of rivalry.
Number of competitors
This is one of the most important factors. The more competitors are operating in a given market, the more competitive the market is. Ecommerce made it easier for new entrepreneurs to get started and removed some barriers to entry, like the need for a dedicated sales force or a physical retail space. In some cases, inventory isn’t needed, and tens of thousands of people set up dropshipping businesses over the last couple of years. The next wave of new ecommerce entrepreneurs was what I like to call the “Amazon FBA guys,” who, for the vast majority of them, did private labeling. Even though this trend is dying down, I had ads for “Make a million dollars per month with Amazon FBA” webinars and online courses for years. The popularity of online businesses contributed to a strong increase in the number of competitors in many industries, especially since the pandemic. However, it did affect every business the same way, as some industries are more difficult to enter (see my post on barriers to entry here – https://fmaingret.com/2022/09/two-types-of-barriers-to-entry-and-why-they-matter/).
Market growth rate
When a market is experiencing rapid growth, companies tend to be more focused on expanding and capturing new customers rather than fighting for existing ones. As a result, a growing market tends to make the environment less competitive. On the other hand, when the growth slows down, the intensity of rivalry increases. Competitors must fight for market share, and this can lead to price wars or other aggressive tactics. And as you know, a price war is a war that no one really wins, with maybe the exception of the customer.
The intensity of rivalry reaches its peak when the market becomes saturated. As explained above, ecommerce contributed to the saturation of some markets. I just searched for “toothbrush case” on Amazon and found a little under a thousand results. Even some previously very narrow niches now have dozens of listings, which is very impressive. Back in 2017, when I was looking for a way to protect my joints from tough workouts, it was rather difficult to find collagen powder. Now, Amazon gives you over 2000 results.
In an industry where customers are brand loyal, and sometimes even emotionally attached to a brand, the intensity of rivalry tends to be weaker. Loyal customers are less price sensitive, decreasing the likelihood of price wars and improving the general profit margins in the industry. They are also less likely to switch to another brand, decreasing the effectiveness of aggressive marketing tactics and the intensity of rivalry.
This type of customer tends to be more engaged with the brand and offers valuable insight and feedback on the products and services provided. This facilitated innovative product differentiations and indirectly contributed to a less competitive environment. Finally, if getting the customers emotionally attached to the brand is key to being successful in the industry, this adds an important barrier to entry that will deter new potential competitors from entering the market.
Generally, entrepreneurs should work toward making their customers loyal and improving their customer retention metrics. Businesses operating exclusively online can’t provide an exciting in-store experience, but thanks to social media and other technologies, it is still very possible to build a strong relationship with customers over the Internet.
By now, you likely already know that product differentiation has a huge impact on the intensity of rivalry. If you are selling commodities in an industry with low barriers to entry, let’s say, iPhone chargers or paper clips, the competition will be intense. If you are competing purely on price and have no effective way to be substantially cheaper than your competitors without slashing your profit margins, you’re not going to have a good time.
Industries with differentiated products tend to be less cutthroat than when everyone sells similar products. Earlier in this post, I mentioned dropshipping and the “Amazon FBA guys” doing private labeling. This is an excellent example, as most of the time, the products they sell are not very differentiated (privately labeled products tend to be easily accessible).
Cost of advertising
In the online advertising space, not every industry is equal when it comes to the cost of advertising online. For instance, the cost-per-click (CPC) when doing search ads can reach $10-$50 per click for keywords like “health insurance” or “car insurance”. This is because the customer lifetime value in these industries is very high, and companies will spend a lot to get these customers. Then, some products like “smartphones” or “vitamins” have a lower CPC, around a few bucks. While these industries are competitive, it wouldn’t be sustainable to spend $50 per click and still maintain profits. Finally, niche products like “protective gloves for beekeepers” tend to have the lowest CPCs, less than a dollar. The cost of advertising alone will not tell you how intense the rivalry is, but it can be an extra indicator that tells you how hard competitors are fighting for online ad space.
Diversity of viable sales channels
This one is a little trickier to explain. When you have a product that would sell well on any channel—Amazon, eBay, your own D2C website, via social media, etc.—you most likely have a winner; it could be because of its unique features, value proposition, unbeatable price, a strong customer attachment to your brand, or other factors. If your direct competitors also have the ability to sell across multiple channels, it could mean that the intensity of rivalry is pretty low (to be clear, I am talking about the ability to sell across many channels, not whether the company does it or not. It could be a strategic choice to only sell on a company D2C website and not address other channels). On the other hand, if your product can only sell well on Amazon, it may mean it belongs to an industry with less differentiation, brand loyalty, more competitors, and, ultimately, a more competitive industry.
When it is difficult and/or costly to exit an industry, companies are more likely to stay, which contributes to a higher number of competitors. If they are “trapped” in an industry where they need to survive, they may resort to aggressive tactics and price cuts to gain customer share. In general, higher barriers to exit mean that the intensity of rivalry will be higher.
How to navigate a competitive environment
Now that we have seen what contributes to the intensity of rivalry in an industry, let’s look at a few tactics entrepreneurs can develop to navigate a competitive environment.
Unique value proposition
If you have not read the book Blue Ocean Strategy yet, I recommend it. Basically, the idea is that a Blue Ocean Strategy involves creating new, uncontested market space where competition is irrelevant. It focuses on innovation, value innovation, and finding new market segments to tap into rather than competing in saturated, “red ocean” markets where competition is intense. It sounds simplistic, “Just find a less competitive industry, bro,” but it is the best advice I can give to those not in business yet.
Target a narrower niche
If you are competing in a broad, highly competitive market, an idea could be to focus on a narrower niche within this market. This can reduce the competition while making your products more appealing to this specific niche. For example, Lululemon first targeted yoga enthusiasts. They became successful in that niche and expanded their product lines to include a broader range of athletic and athleisure wear.
Personalization and focus on customer retention rate
Offering a personalized experience to existing customers can help increase the “switching costs”, as some customers won’t want to give up an enjoyable shopping experience. AI technologies are improving personalization options, which is something most customers find valuable. The customer retention rate is a key metric, and working toward improving brand loyalty will help entrepreneurs in a competitive industry. Loyalty programs, member discounts, and subscriptions are other ways to keep customers loyal and generate repeated sales.
Addressing the right channels is important in a competitive industry. If everyone is selling on Amazon, are there any untapped channels that could be less competitive? Most of the time, the intensity of rivalry can be intense across all available channels, but there may be some opportunities on other less popular channels.
In the ecommerce world, the intensity of rivalry sets the stage for fervor business drama. Today, we had a front-row seat to study the intensity of rivalry according to Porter’s framework, with a focus on online businesses. There are many factors affecting an industry, and it is key to understand them to make impactful business decisions.
Understanding the competitiveness of an industry also helps create tactics to navigate the business environment. In my opinion, a strong value proposition and a high customer retention rate are the most effective tactics companies use to make their competition less relevant. Ecommerce has attracted millions of entrepreneurs over the years, and the recent pandemic only accelerated things. That is why understanding the forces that shape your industry is needed to gain a competitive advantage over all these new potential competitors.