You have a few options:

You can contact them, offer to take them to lunch if they're local-ish, and see if there's any potential or willingness to collaborate. Maybe you each prefer to handle different aspects of the market.

Or, you can decide to not lose focus, and you can concentrate on the clients and customers and market that you have. Continue to do what you're good at doing, and keep slowly improving your product or service. So, maybe you won't be the biggest player in your market ... and maybe that's OK.

Or, you can learn to really enjoy competition. (I love it.) You can use this as a great opportunity to get free advice on areas you can improve, because all you have to do is keep an eye on what your competitor does. But, don't become defined by them. Try to figure out how to be better than them. That doesn't necessarily mean being cheaper, or shinier, or faster. That just means figuring out what your customers want, and then doing the best job of providing that that you can imagine. You have to be able to have fun competing with the other company. Being genuinely friendly with them (and helpful to them!) while trying to think up ways of putting them out of business, that sort of thing.

"Rules for Revolutionaries" is a great book that touches, in part, on handling competition. It's a quick read and fully worth it, if you have the time or inclination.

Great response - it seems like the second and third option work hand in hand. Concentrate on the clients and customers and market that we have, continue to do what we're good at doing, keep slowly improving your product or service by using this as a great opportunity to get free advice on areas we can improve.

It seems that the customer is king in this case, so I'm lucky to have good relationships and can gather opinions from key clients.

I highly recommend getting in touch with HN user skmurphy for this if you want to gather information from specific clients. It's one of his company's specialties, and his rates are quite fair.

There are two ways to increase revenue. One way, like your competitor is doing, is to capture a bigger market share of people looking to use your product.

The second way, is to grow your market share. Sometimes having more companies competing with each other ends up doing just that, as it doesn't just validate your niche to you, it validates it to the consumer. You may want to find ways to partner with this company, to sell yourself as one of the better choices for this industry, etc.

Put it to you this way: I'd rather be Pepsi than Rolex.

"better, faster, smarter", if you can measure these you can improve these. Focus on that.

- Work hard, have aggressive deadlines and get rid of the people who are being lazy. You are in business for a long time and probably your developers have become bored and run out of ideas. You need to challenge and motivate them like in the early days. - Get some smart people as advisors/consultant to help you generate innovative ideas to improve your product and define the timelines. Especially if you don't have any technically strong guys in the core team.

The bar has been raised in your market.

The goal should be to raise it even higher, not play catch up.

They didn't emulate you,that's how they passed what you're doing.

Don't just copy what they do. You have to focus on your own development and should try to not mimic theirs. You don't know their plans and running after them will distract you from your own way. It might be just your impression that they are faster or whatever, since you know all the details in the field. Sure, you can emulate some good points at the moment, but keep focusing on an overall strategy that has no room for them, too.

Work with your users and do not focus on what your competitors are doing all the time. Take Mint for example, they intentionally ignored the competition and it worked out ok... In terms of what the competitor is doing right, you should be getting that info from your users. One more thing... make sure you are doing one thing extremely well in your product versus many things.

tweak your business model, rethink of the who, what, when, where, how, why of your business, like: who else could be interested or benefited from your offers? what when or where does the consumption often take place? Can you shorten the consumption chain? .. questions like these are pretty basic but they might open new opportunities.

I'm a fan of fast execution but I think situation like this requires some times to sit down and think for awhile before doing something next. Read "The ultimate competitive advantage" or "the entrepreneurial mindset", the 1st book introduces a new way to think about competitive advantage, the 2nd book contains lots of great tool-kits for "thinkers" to differentiate their offerings as well as how to stay ahead of your competition, these 2 are complementary. but read "the entrepreneurial mindset" 1st for some tools that can be implemented immediately (like "quizzing", "attribute map", "stratification map" ...)

Analyzing them will help you. What about marketing efforts? If you were in the market first, you should have an advantage over the newcomer (your customers should be thinking of you before they think of the competition). If your name is known to the customer, can you leverage that?

What other choice do you have? Give up? Pivot?

The good news is that you've just gotten validation that the market niche you've chosen is healthy. Take the opportunity to shake off whatever complacency might have been lurking, and get to it. Assess, analyze, iterate.

Thanks for the advice - agree that complacency has to go by improving and iterating the product.

Figure out what you do better than them maybe? There must be some part of your product that's better than what they have. Can you leverage that? Finding their weak points is a good thing, but you must also know what your strengths are.

Nice try, Nokia!

Get better, faster, and smarter than them. If you can't, think of a new angle to your product/market and keep working at it. Good luck!

definitely have coffee with them and get a feel for their personalities and where they are.

if they are really good and you are confident in your abilities too, it might be to mutual benefit to join forces. That isn't unheard of - e.g. paypal was the result of a merger.