For a few years, I have been producing an application which complements a number of "IDE-style" tools in my domain. My application is useless without one of these tools.
I have made a handful of sales, got a few happy customers, and collected a half-decent mailing list, but as far as I can tell, my only options forward are:
Option 2 would be a no-brainer, except that one of these "IDE-style tools" is produced by a friend of mine, and by extending my product, I would be entering in direct competition with him.
For a long while, I wasn't sure I could pull off Option 2 so it wasn't really an issue, but my programming skills have improved and while playing around, I developed a working prototype with the key feature set, so I know I can deliver a decent tool, and even produce a number of unique features I have been longing for as an user. In other words, I am ready to enter and compete on that market.
On the one hand, I don't want to damage my relationship with my friend, but on the other, this is the only way forward for that application and it has been a frustrating experience to earn peanuts for a fairly complex utility when other tools on the market generate sales in the 7-8 figures range.
What are your thoughts on the matter? As entrepreneurs, what would be your reaction if a friend of yours decided to enter your niche with a competing product?
There's nothing unethical about competing with people, even friends.
Rationally speaking, your friend should be ok with it.
People are not rational so your friend might get very offended and it might damage your relationship with him.
We can't tell you how he'll react. Everyone is different and everyone would have a different reaction in this situation.
Business is business, friendship is friendship. Usually best not to mix the two, unless you are going into business with someone that understands that separation.
If this is a close friend, you could float the idea of a partnership with him or her. Combine your product or bundle them.
Or mention to him or her that you've been thinking of creating your own product that might kind of compete with something they do. Gauge the reaction.
If your friend has been working on a product for some time, they already have an advantage on you in that market. If you value the friendship greatly, you can gauge interest in something that complements their product and both profiting.
Or you step off and make your own product that competes. It's not like yours would be the only product out there your friend is competing against. Personally I think the nice thing to do is let them know you're thinking of this idea so it doesn't blindside your friend when/if you do this. It's not a requirement...as I said, business is business...but it's the nice thing to do.
If they react poorly to you moving into that market I'd say it's not your fault. It's a part of running a business. Your friend has to hope his or her stuff is better than yours!
Business is war. The question is are you ready to sacrifice your friendship ?
You should first look for a way to partnership with him.