Substitutes give customers several choices, both within an industry and beyond, to access products or services that satisfy a similar need. For instance, in the transportation industry, a traveler moving from destination X to destination Y has different modes of transport to choose from. Therefore, airlines operating in that route will compete with each other as well as with other possible means of transport available.
Substitute products provide the same or similar benefits to an industry as a product from another company.This creates a replacement risk as customers can easily switch amongst those products.
The threat is higher in generics or undifferentiated products compared to that from unique products. With many possible substitutes, the business has little control over how it chooses to sell a product or set prices.
With that in mind, companies facing fewer threats from substitutes face little competition and have bigger chances of earning higher profits.
Factors that Increase the Risk of Substitutes
The threat of substitutes is stronger in some situations than in others. Here are some of them.
It’s easier for a consumer to switch products if substitute’s prices are more reasonable. Additionally, it can limit how much a company can increase product prices. The decision to price higher than the substitute will be the onset of consumer migration and profit loss.
A consumer experiencing little or no switching costs can easily explore and switch to more appealing substitutes. Unless there is differentiation or brand royalty, moving is easier.
There is an excellent possibility that customers will switch over if a substitute product performs at the same level or better level than the current product. Read more about online slots no deposit free bonus. For instance, consumers would rather travel by train or bus, than wait for an airline whose flights are always delayed.
If there’s no substitute available in the market, then none of the above factors would exist. The presence of more substitutes means a company is losing its power over the consumer’s choices. Thus, a company must look beyond traditional competitors or get more creative to identify and tackle threat potentials.
Analyzing Threats of Substitutes
Threats are not readily recognizable. Thus businesses must focus on identifying these threats and come up with lasting strategies to curb them. While at it, put more effort into finding and solve the elusive threats rather than paying more attention to handling direct competitors.
Here’s how a business can handle possible substitutes.
- Identify problems– Which problems can your product or service solve? Think about all the possibilities and come up with a detailed list.
- Identify other solutions– Are there other ways that can be used to solve the same problem? Which methods will be more appealing to your customers?
- Identify substitute appeal– Here is where you need to understand why your customers would prefer a particular solution. Ask yourself these questions:
- Does the alternate provide any benefit that you do not?
- How do the prices differ?
- Can prices suddenly change? If yes, why?
- What are the weak points in the substitute item?
- What barriers, if any, can prevent a customer from switching?
- What trends, if any, are defining the substitute product industry? How do they provide value to the customer?
- Create countermeasures and strategies– Now you can come up with strategies to put the alternates in check. The strategy should either lure people in from a substitute or prevent customers from leaving.
- Determine threat severity– Do so by answering the following questions:
- Is there any substitute available in the market?
- Do the substitutes perform better than your products or competing products in the industry?
- Is the substitute product’s quality similar or better than yours or other competing products in the industry?
- Is the substitute product cheaper than yours or other competing products in the industry?
- Are switching costs lower?
How to Mitigate Threats of Substitutes
The following measures can help you avoid threats from a substitute.
Businesses can make more profit if they provide the best value for money to customers. When customers are assured of value, they will rarely think of switching to other products.
By coming up with a unique product, customers’ needs get satisfied, and they won’t have reasons to seek substitutes.
Though not easy to achieve, its one of the best ways a company can retain consumers without worrying about switch-overs. It takes years of consistently providing value to your clients to stand out as the go-to brand for your target customers.
How to Capitalize on Availability of Substitutes
Once you notice a substitute with the potential to cause switch-overs, you can act fast, in an attempt to persuade customers to use your products. The following are steps to follow.
- Identify Customers that are Likely to Switch Over
Some of your customers can leave for a substitute when they feel their needs are not met, or when they aren’t happy with the company’s operations and practices.
- Communicate and Build a Relationship With Them
Once a business singles out a group with the potential to leave, then it’s time to interact and create a lasting relationship with them. This can be through specialized mails, point of sale interactions, or any other method. The bottom line is that the company must show genuineness in their communication approach.
- Teach Them About the Company’s Products
Once you can interact, please take the opportunity to educate them about your products. Inform them about the products you sell, mentioning their key features.Similarly, mention how how potential customers can benefit from them.
- Provide Special Packages and Trial Purchases
Package deals, special discounts, and trial purchases make consumers feel they’re valued. Buyers want to associate with sellers that care. Furthermore, a genuine discount is difficult to turn down when the product is needed.
- Keep Strengthening the Relationship
The already built relationship can be lost by a cut of communication. Even after making sales, keep communicating to solidify the new relationship.
- Put Efforts into Building Customer Loyalty.
It takes time to build, but its achievable through the provision of reliable products, and quality services. Additionally, with excellent communication systems loyalty is gain-able.
- Concentrate on Maintaining Customer Loyalty
A business can retain loyal buyers by selling quality products and providing good value for money.Its also crucial to continue satisfying the customer’s needs. When the needs are not met, nothing can stop customers from switching to competitors. Therefore, a company must constantly improve its product and services to meet the ever-changing demands of the audience.
Threats of Substitute Products or Services: An Example of Amazon.com
The threat of substitute products for amazon is high since there are many other online retail companies, such as Alibaba. There are also physical retailers that customers can buy from. The threats facing Amazon are:
- High availability of substitutes (strong force) – There are many alternatives like eBay, Alibaba, Overstock, and Zappos.
- Low switching costs (strong force) – Amazon customers can easily transfer from the company to other retailers.
- Low cost of substitutes (strong force) – Most of the other retailers sell products at a lower cost.
Its biggest advantage is the brand loyalty has built through many years of excellent customer service. Therefore, even though customers can switch easily from one brand to the others, Amazon remains one of the dominant forces in the online retail industry.
Thus, for the long-term success of the company, Amazon must constantly employ strategies that address substitution as one of its priorities.