Sharpen Your Competitive Edge by Benchmarking

You thought your products were really good but now it appears you are losing market share to your competitors. What can you do?

You thought you controlled costs pretty well throughout your organization. But now you are beginning to wonder, do I really control costs as well as other firms in my industry? Do I have any particular function where my costs are a lot higher than competitors? How do my profit margins really compare? How can I find out answers to these questions and more?

A powerful way to create the energy needed to raise the aspiration level and to make improvements at a small business is to benchmark competitors.

How Do I Get Started Benchmarking?

I divide benchmarking into two categories:

  1. Benchmarking financials
  2. Benchmarking everything else

In benchmarking financials, the first challenge is acquiring good financials to compare to your own results. Often, industry associations, and sometimes industry publications or websites, will put together average financials. Ideally, they will break out firms by size. Even so, they might not cover firms as small as yours. Still, if the companies covered by the surveys are on average larger than yours, it may still be meaningful to compare some of your performance metrics with theirs.

Sometimes an industry competitor who truly appreciates the value of benchmarking will hire a consulting firm to assemble results from several similar sized competitors, keeping the identities of each particular firm in confidence. The other firms either share in the cost of the survey, or perhaps simply donate their information in exchange for receiving the results of the survey for free.

In addition, some surveys can be found for little or no cost on the Internet. Large corporations spend a lot of money benchmarking salaries, often hiring expensive consulting firms to monitor industry averages, and then to make recommendations.

In benchmarking financials you want to restate your recent historical financials in the same format as the survey you are benchmarking. This allows you to line up each set of financials side by side so you can instantly see the differences. I would suggest entering the key items in a spreadsheet and calculating the variances (the differences between your numbers and those of the other companies).

You should carefully look at each function and see how your company compares with the survey. The key metric I would look for is the cost of each function as a percentage of sales. How costly is your overhead, such as office expenses and the like, for example? While I would go through each category, I would particularly focus on any category where expenses are significantly higher than competitors’.

It may be particularly uncomfortable, but I would be very eager to slash our costs as quickly as possible if I found an especially high overhead category.. Items that more directly contribute to the operation of the company – such as production, delivery of services, or marketing – I would tend to give some thought to before slashing.

If your company has high costs in the goods category, the issue might not be your cost structure. It could be your prices are not high enough for your products.

Or it could be that your mix of goods or services is different than those of the other companies in the survey and, therefore, your cost of goods will be different from theirs.

If your sales and marketing expenses, as a percentage of overall sales, are higher than the average company in the survey, you should examine the numbers closely. But even if your overall sales and marketing expenses are higher than your competitors doesn’t mean you should cut them without examining all the factors in detail.

Why is the expense high? Is it the sales expense? Is it the marketing expense? Is it marketing to the trade? Is it marketing to consumers? Maybe your products lack the brand recognition of your more established competitors and you need to give them more marketing support.

Having these benchmarking numbers is like having a consultant in your office asking the important questions. Maybe the answer is that prices can and should be lower. Or the answer may be more complicated than that. The key point is that having a good survey to benchmark your numbers is like having an industry consultant working for you, asking the key questions that can improve your business.

Perhaps the first area of a business I would benchmark wouldn’t be the financials, but, instead, salaries and wages. With regard to positions particular to my industry, I would be especially eager to see what I am paying versus my competitors (positions that are common at most companies can be compared with more general surveys). Large corporations spend a lot of money benchmarking salaries, often hiring expensive consulting firms to monitor industry averages and then make recommendations.

As much as I believe in being frugal in running a business, I view it as getting the best value for the least amount of money, and not merely paying the lowest price. I generally believe that if you pay people a little more than the average for their position in your region, you will attract people who will be more talented, more motivated, and less likely to leave. All of this adds up to being far more beneficial than paying people above-average wages (assuming this leads you to attracting above-average employees). For example, you may decide that you want to target your wages in the upper third or quarter of your industry.

After financials and salary surveys, I would be most likely to benchmark the area of products or services. I would quickly pull together everything about our competitors’ products and services and match them up with our own. If I had physical products to compare, I would put them side by side. If I had a management team this would be a great group-meeting topic.

If we were dealing with services I might list salient points on a white board. I might also collect examples of advertising. Next, I might list some of the key points of my competitor’s products or services and compare them against my own. I would then customize a list for each situation. A list might look something like this:

  • Main features
  • Secondary features
  • Main consumer benefits
  • Secondary consumer benefits
  • How is it positioned in the marketplace?
  • Advertising/marketing vehicles
  • Distribution
  • Price point

I would be careful not to produce benchmarks too often, unless there was a pressing need. I feel that after you do it on one or two key products or services, you and/or your staff will quickly get fatigued on this exercise and the benefit will fall off significantly. I would suggest that you try to benchmark at least something on a regular basis but not too often – maybe once a quarter, or even once a year. But make sure it is a substantive process.

The next area I might benchmark would be the sales process. I might use one round of benchmarking to compare our sales materials and our presentations to that of our competitors. You can get this information by asking one of your favorite customers for information about your competitor’s presentations. Or, if one of your sales reps is friendly with their counterpart at a competitor, he or she can ask for information.

Shipping and/or product or service delivery are obvious areas to benchmark. How long does it take you to process orders or provide service after an order is placed? What percentage of shipments are lost or considered damaged? How do these percentages compare with your industry? If you are losing too many shipments to damage, do you need heavier boxes or better packing materials?

Customer service is another area you can benchmark. Some aspects of customer service you can put into numbers. How long does it take a competitor to respond to an email request for information and how long does it take your firm? How many times does the phone ring before someone picks up? How many hours a week are your customer service phone lines open? Consider the softer aspects of customer service, too. How does your standard customer phone greeting compare with your competitors? How does the tone of voice of your customer service person compare with theirs?

Don’t forget to benchmark your website, as well. as your social media presence? How do you compare in those areas?

As you can see, there is an almost endless list of what aspects of your business you can benchmark and what you can benchmark it against. My overall feeling is to not benchmark as much as possible. In fact, I’d rather benchmark as little as possible. But what I did benchmark would really matter. Sometimes you can’t find what really matters until you start the benchmark process.

It can be hard to set aside time for benchmarking. Is it going to be worthwhile, you might ask yourself? You don’t know for sure until after it is completed.

But if you are a one-person firm, you should set aside a big block of time – perhaps a full day or more – to really benchmark carefully. You should give a lot of thought to what you want to benchmark. What would likely deliver the biggest insight and potentially the biggest gain? If you are a one-person firm, getting customers’ inputs, even of just a couple customers who you think may be candid with you, could make all the difference. I would be inclined to get their input in advance – save it in their own words on your computer and then, when you are thinking about benchmarking, pull out their comments and study them.

As the entrepreneur, you are already totally committed to making every aspect of your business as great as possible. Hopefully by now you understand how important benchmarking might be. But if you have other employees, particularly key employees, they might not be quite as sold on the process.

It is critical to get cooperation from your employees as early as possible in the benchmarking process. That doesn’t mean only at the beginning of the benchmarking meeting, but when you are formulating the whole process, including thinking about what areas you want to benchmark. In fact, it might be preferable to have key employees, and not you, spearhead the benchmark process. Perhaps schedule one meeting dedicated to benchmark marketing, for example, with the meeting orchestrated by your marketing manager but including an open-ended discussion with all managers.

All too often, I have found that key employees think our products, services, marketing, and operations are “just fine,” when, in fact, our competitors might be outperforming us. Making them aware of the actual situation is why you want to let key employees, not just you, the entrepreneur, champion and spearhead the benchmarking process.

When you get to the benchmarking meeting itself you may want to have employees of all levels involved. If they see how the competition is actually doing things they may feel much more motivated to want to change how they are currently doing things, to do them better, and to outperform.

Benchmarking can be a very powerful process that can potentially help propel your business ahead. But to do it well, it will take some time, some energy, and, most of all, a mind open to seeing what you can learn from your competitors and the rest of the industry.

Whether you are a one-person startup or an established multinational, benchmarking competitors is a powerful tool.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.