In my last blog entry, I posed one of the first questions an entrepreneur should ask themselves before moving forward with their endeavor, “Is my good idea a good business?”

I proposed that building an economic model can be a helpful tool in answering that question.  Start simple using your existing knowledge of revenues and costs.  Next, validate your initial assumptions through market research.  I discussed how market sizing and segmentation can help forecast demand, which is used to calculate both revenue and variable costs.  Below, I will discuss how researching your competition can contribute in building and/or supporting the economic model.

A competitor is any entity that provides the same or similar product or service to the same market or market segment.  Competitors can be direct or indirect.  An example of direct competitors is Dell, Hewlett Packard, Sony, Apple, etc for notebook computers.  An example of indirect competitors is Dropbox.com and Western digital, which provide different but substitute solutions for data storage and backup.   I will not go into details in this article but do not make the mistake of thinking you have no competitors, even if you consider your idea unique.  Everyone has competitors.

Researching competitors can help you support assumptions for both revenues and costs. If the competitor is a public company, most have copies of their annual reports that you can download from their site. You also can find copies of all copies of US public company filings at the SEC Edgar web site.  Annual reports are listed as 10-Ks.

The annual report profit and loss statement and statement descriptions helps you identify the important revenue and cost categories to consider in your economic model.  (Note: It is important to make sure that the companies you choose to research are pure plays, that is, they only own and operate one type of business.  Otherwise, the information contained in the annual report, especially the financials, will be an aggregate of the different business types and not be representative of the business you are trying to understand.)  If you are able to obtain annual reports of three or more competitors, you also can estimate the average percent of sales the different revenue and cost categories represent.  Some industries produce annual operation reports that provide the average establishment revenue and costs or revenue and cost percentages for the industry and/or segments of the industry.  The restaurant and hotel industries are examples of two that do.  Often these reports can be quite expensive.  Therefore, I suggest you do a search online at WorldCat to see if a nearby library carries the reference.

Some industries are comprised only of private companies.  This does make finding information to build and support your economic model more difficult, however, you still can find plenty of public information of these companies online.  Competitor web sites are a great place to start, providing all types of financial and operational information, such as traffic, sales, growth rates, pricing, etc..  In a previous project I worked in the music industry, I was able to determine a privately-held competitor’s music catalog annual size and growth, annual traffic and traffic conversion rates and annual product sold simply by reviewing their periodic press releases.

Industry associations, periodicals and blogs also can be a wealth of financial and operational information through industry surveys, company profiles and interviews with industry insiders.  Business networking sites, such as LinkedIn, allow you direct access to some of these industry experts directly through introductions or indirectly by broadcasting questions.  Members who are knowledgeable in the topic are incentivized to respond by being awarded subject matter expert status on their profile page for best answers.

In summary, competitive information is a great way to check your initial revenue and cost assumptions and to help build and support a more robust economic model for yourself and other stakeholders.  Still, there are some of you who may say that your existing competition is not a good reference as your business model is unique to your industry.  Although this may be true, you still can find existing public information to help build and support your economic model using reference businesses, which I will discuss in my next article.

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About the Blogger:

Jeff Maglin is a partner at vokse, a business consulting firm that specializes in developing business plans for start-ups and early stage ventures.  Jeff has over 10 years of business plan writing development experience, working in a range of industries and across business functions. Prior to his current role, Jeff held management positions in product management, marketing and sales. Jeff also is active in the New York City entrepreneurship community.

Jeff has a BA from the University of Michigan and an MBA from Carnegie Mellon University.