You already have a couple of clients prepared to pay for your software. If the 'three years ahead' competitor is so great, why aren't they using the competitor's product rather than yours?

It sounds to me like your competitor is targeting a different market to you, and picking up some of your target market as a happy accident. If you focus on the needs of your market, it becomes less and less likely that those sort of people will use your competitor's product.

I suspect the competitor is unlikely to care too much about your product - they'll see it as a 'low end' solution that only has the potential to take away customers they don't make much from anyway.