Competitor benchmarking is a valuable tool that allows business owners to understand how their financial performance stacks up against others in their industry, helping to highlight both strengths and areas for improvement.
What is competitor benchmarking?
Competitor benchmarking is the process of comparing your business’s financial performance against competitors. There are two common types of comparison:
- Direct competitor benchmarking is where direct competitors are identified and chosen and research is undertaken to compare their business performance against yours.
- Industry benchmarking compares your business performance to that of the broader average of businesses operating in the same industry as you. We provide this to our clients as part of our annual performance report, using the Standard Industrial Classification (SIC) system used by Companies House.
What are the benefits of competitor benchmarking?
Comparing your business against businesses in the same industry is vital, in order to identify areas where you are performing well, but also more crucially, to identify areas where your performance is below that expected of the industry.
This, in turn, can help you form key realistic targets, aimed at improving performance and developing a competitive advantage.
This insight is not possible when simply comparing your business performance year on year, as whilst the figures may show an improvement, performance may still be falling short based on industry expectations. Competitor benchmarking shows where your business needs to be, and therefore can be a motivating factor in strategic decision making.
What are the key metrics to compare?
Competitor financial benchmarking is not necessarily straightforward, due to a lack of publicly available information, for example small companies accounts do not include a Profit & Loss Account, and therefore do not include information on turnover or profitability. There is therefore a whole industry of specialist tools seeking to provide insights and analysis to help your business.
Some of the key areas we cover in our performance report to provide valuable insights are:
Turnover
This helps assess your business’ position in the market. Significantly lower turnover may indicate an issue with pricing, the product itself, or poorly targeted marketing. Key metrics to compare may be advertising cost as a percentage of turnover, as this can indicate how efficient the advertising spend is in generating additional revenue. In a service industry, wages and salaries as a percentage of turnover may indicate how efficient the business is in completing chargeable work.
Profitability
Improved profitability over competitors means that your business is more efficient, and can therefore adapt quicker to take advantage of new opportunities. The key metrics here are gross profit margin and net profit margin.
Liquidity
Improved liquidity over competitors means your business is better able to invest in areas in order to drive growth. The key metrics here can be broken down into the separate elements, such as stock days, debtor days and creditor days. Higher stock days than competitors, for example, may indicate overstocking, with the business at risk of carrying obsolete stock, possibly incurring higher rent charges than competitors due to more space being required, and having less available cash to invest in new product ideas.
Other benchmarking considerations
This FAQ focuses on financial competitor benchmarking. However, there are many other non-financial factors which it is also beneficial to compare to your competitors, in order to develop strategies to create a competitive advantage. Depending on the industry, these include areas such as product features, pricing, brand image, social media presence, and customer service response times. The key is to identify competitor’s strengths and weaknesses in order to identify key areas to improve your business.
If you need help with this, or with other advice, then please get in touch with our accounting team.