If you enjoy this article about competitive benchmarking, take a look at this similar video about how to analyze competitors.
All Good to Great companies began the process of finding a path to greatness by confronting the brutal facts about the reality of their business. When you start with an honest and diligent effort to determine the truth of your situation, the right decisions often become self-evident. (Jim Collins)
Imagine you are driving a fast car on the Autobahn 9, the road connecting the German capital to Munich. Parallel to the highway, you slowly see a train approaching. The aerodynamic shape of the locomotive and continuous red stripe through the wagons reveals that this is the ICE Schnellfahrt, or simply ICE S, one of the fastest trains of Europe.
You get puzzled. The way the twenty thousand horsepower machine slowly approaches and overtakes your car raises the question: why it is so slow, in such a straight and empty rail? Is it broken? Are those passengers from Berlin to Munich not in a hurry?
After a moment of reflection, seeing the formidable train gently opens distance to you, you glance at the car velocimeter: 250km/h.
That is when you realize that the rail convoy was in reality dashing at three hundred kilometers per hour. Wrong benchmarking caused the illusion of the slow train.
How to know when your business is doing well, and when it is wrecking?
The first and most common answer would be “If we are having a profit, it is fine”. It is a simplistic and often naïve attitude of new companies. It is also a fallacy that often destroys investment portfolios. If your profit is below the cost of capital or because of investments delayed, better postpone the celebrations.
Likewise, losses and negative margins are not synonymous with poor management or miscarried business. It may be just seasonality, local economic conditions, or, as of 2020/21, a global virus outbreak.
The high-speed train in our previous example looked slow because of how the human mind perceives relative speed. To see how fast it was would be enough to have a fixed point of reference. A benchmark — the point of reference for business — will help to avoid illusions in your entrepreneurial journey.
Competitive Benchmarking will give you peace of mind
Any hotel operator in a coastal city would be euphoric with lucrative summers and depressed during unprofitable winters if they did not benchmark. Managers of ski-resorts, on the other side, would have the opposite behavior.
This is not smart nor healthy, and it can get worse.
Do you remember the fable The Ant and the Grasshopper? If an entrepreneur gets deluded that he is doing very well without realizing that the success is just cyclical, he may not save for the winter, just like the grasshopper.
My favorite philosophical school is stoicism, and one of its teachings is that just a fool gets upset for not succeeding in something out of his control*. Therefore, that your business needed to navigate during the storms of a pandemic, a natural catastrophe, or a social turmoil, is not your fault. You could not avoid those things.
What you can do is to take action, control costs, and keep revenue streams alive during hard times. The only way to assess if you are doing it properly is to benchmark exhaustively. Competitive benchmarking will show what to consider “normal”.
Not always you will be able to benchmark. Sometimes you are the sole player in the region or in the whole industry. If your product is completely innovative, it’s tricky to make comparisons with businesses that are similar but not the same. However, when you have an established pool of competitors, comparing indicators will draw the line in the sand.
Compare quality standards, costs, prices, and any indicator important to your core. But keep your soul.
You got how important is performance comparison when venturing in unknown seas. But compare what? Which indicators you should benchmark against the competition?
Most conventional markets have their pre-established sets of indicators. A simple internet search for performance indicators for + [business type] will tell you beforehand what you need to measure against. Hint: get ready to see a bunch of acronyms.
Example of performance indicators:
Consulting firms: RPC (Revenue per client), CRR (Client Retention Rate), Repeat business rate, etc.
Restaurants: RevPASH (Revenue per Available Seat Hour), Food and beverage sales per guest, etc.
Hotels: RevPAR (Revenue per Room), Occupancy Rates, ADR (Average Daily Rate), etc.
Mobile App Company: CAC (Customer Acquisition Costs), Average Revenue Per User, Conversion Rate.
When implementing benchmark tools — often an electronic spreadsheet does the job well — remember to be aware of your firm specificities. Makes little sense for a low-cost airline to compare their average price to a first-class charter since they make money in different ways — the low-cost carrier profit from selling things like extra luggage, while the first-class charter earns with all-included pricey tickets.
Remember that opportunities are not missed, but taken by someone else. Do you want to react quicker, discover tendencies, and grab prospects before everyone? Discover first how fast your car (or business) is against the train of the competition. Benchmark.
*On the subject of being upset by changes out of control, I recommend the classical manuscript Enchiridion, from the Greek philosopher Epictetus.