Philosopher - 3:16 pm on Mar 18, 2010 (gmt 0)
I wouldn't eliminate them from you plans. An SEO firm can be a blessing, but like many areas, you have to do your due diligence.
I am surprised that firm would consider taking you on as a client with that type of conflict of interest. It's not uncommon to find firms that specialize in certain areas and may have multiple clients in that area (real estate is a good example). To me that's acceptable if it's made known to the client, but to actually be running their own site and taking on a client in that same market is very different.
I just recently had one of my suppliers call us asking our pricing for our services (we do both SEO and run some of our own ecommerce sites as well). He knew this obviously, but I still had to tell him I couldn't work with him for that very reason.
There are plenty of other firms out there.