It is important to understand the market I am in, to optimise my product and service.
How this helps you
Think about substitutes for your product or service to find out what choices your customers have. Look for instance at the size, the price, the functionality and the look and feel. Sometimes a substitute doesn’t look at all the same. A substitute for a holiday in Spain, might be a home solarium. Both give you a nice tan…
What is it?
The existence of products alternatives increases the propensity of customers to switch. For example, tap water might be considered a substitute for Coke, Another example is the substitute of a landline phone with a cellular phone.
Substitutes is one of the forces in Porter’s Five Forces analysis. This is a framework that attempts to analyse the level of competition within an industry. Porter’s Five Forces include the threat of substitute products or services, the threat of established rivals, and the threat of new entrants, the bargaining power of suppliers and the bargaining power of customers. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit.
How does it relate?
The Five Forces model helps you to develop a business strategy. It helps to determine the competitive intensity and therefore attractiveness of an Industry.
Your next Waypoint
Take a piece of paper and write the name of your product or service in the middle. Now take 15 minutes to write down substitutes.