How To reduce threat of substitutes
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Substitutes are products that do the same job for your target customers although they are different in nature to your company’s product.
Butter and margarine, beer and wine, coffee and tea are all classic examples of substitute products. They are a threat to
profitability because they put a cap on the prices that you are able to charge for your products and services. For that reason, “substitutes”, as they are also known for, can limit the profitability of your business and must be taken into account as part of your business strategy. The threat of substitute products tends to
be low if buyers face high costs when switching over to the substitute. For example, if a company outsourcing its graphic design wanted to do the work in-house, they would need to consider the cost of buying specialized software licenses, powerful graphic computers and other tools when evaluating the switch, and the higher the cost of internalizing the design work, the lower the incentive to switch. For that reason, the vendor (in this case the design company) must keep its prices
low enough to make the buyer’s decision to switch a bad financial decision, but high enough to maximize its margins. A new take on identifying substitute products is Professor Clayton Christensen’s Jobs to be Done framework. This framework proposes the idea that products are “hired” by customers to do a job that they need to get done. A low-carb diet for example can help a young woman lose weight quickly, but we could also say that the
“job” the diet does for her is to make her look in better shape for a wedding next month. This alternative way of thinking can help you see how diets then compete with products from other industries like apparel, corsets, make-up and others that could also make the buyer look better in a short time. Focusing on the “jobs” that need to be done, rather than just segmenting a market by demographics, helps you see the true competition that your products have. No one could have
put it better than legendary marketing professor Theodore Levitt when he said “People don’t go to a hardware store to buy a quarter-inch drill. What they want to buy is a quarter-inch hole in the wall!” This article has been extracted from Sun Wu’s book Strategy for Executives which can now be downloaded for free here. Porter, Michael E. Competitive
Strategy: Techniques for Analyzing Industries and Competitors. Free Press. Kindle Edition. Magretta, Joan. Understanding Michael Porter: The Essential Guide to Competition and Strategy. Harvard Business Review Press. Kindle Edition. Threat of Substitution. What is it?Threat of Substitution Companies are concerned about the threat of substitute products (or services) displacing their own. The threat of substitutes is high when rivals or even companies outside the industry offer more attractive and/or lower cost products. Buyers then have the opportunity to make a price/performance trade-off. The cost of switching is also a factor; if it is high, the treat of substitution is low. Questions to AskIs it easy for consumers to switch to another product/service? What are the major substitute products? What are the trends in market share of the product and its substitutes? What are the growth rates? What are the price/value characteristics? Are consumer preferences or consumer demographics changing? What are the Company's Products and Brands?Companies describe their business and list their business segments, products and brands in Item 1 of their 10-K report to the SEC. Find the 10-K report on the company's website on the "Investor Relations" page or search the SEC's EDGAR database. Find Market Share of Products or Brands
Find News about Innovation and New ProductsArticles from trade journals are some of the best sources of information on new products and technology innovation.
Find News and Research on Brand Equity
Find Reports on Consumer Preferences/Consumer Demographics
What factors might impact the threat of substitutes?The threat of substitution is high when rivals, or companies outside the industry, offer more attractive and/or lower cost products. Buyers then have the opportunity to make a performance/price trade-off. The cost of switching is also a factor. If it is high, the threat of substitution is low.
How can a company reduce the threat of substitute products or services quizlet?How can a company reduce the threat of substitute products or services? Market the product to less than ten customers. Ignore competitive forces. Offer additional value through wider product distribution.
How can you increase the threat of substitutes?The following factors cause a higher threat of substitutes for an industry:. Customers can easily switch between products.. Substitute products are readily available to customers.. Substitute products have better features than comparable products within the industry.. What is an example of threat of substitute products?Butter and margarine, beer and wine, coffee and tea are all classic examples of substitute products. They are a threat to profitability because they put a cap on the prices that you are able to charge for your products and services.
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