Analyzing Your Industry: SubstitutesPosted by Jessica Oman
Substitutes are defined as products or services that consumers can buy instead of your product or service, to try and fulfil the same need. This is the second post in a series of five describing various aspects of the 5 Forces analysis, which is a useful tool for defining strategy in your business plan. You can read the first post about Rivalry and Competition here.
Substitutes and Indirect Competition
Indirect competitors and substitutes are very similar. For example, a grocery store indirectly competes with a fast food restaurant because both can help consumers satisfy their hunger. The products that each business sells can be substituted for one another to satisfy that need. So I could buy some produce at the local market and make myself a salad, or I could buy a slice of pizza, and either way, I’d get to eat.
Why Care About Substitutes?
Substitutes are important because they can help you understand your target market’s buying behaviour. If your ideal customer buys your organic dog food every month and then all of a sudden stops showing up to your store, she could have found another brand she likes, or she might have bought a substitute – like bulk, commercially branded dog kibble – because the supermarket was more convenient that month. Understanding these decisions can teach you a lot about how to position your business for the greatest chances of success.
This can be tricky, because depending on your industry, you might have dozens or even hundreds of indirect competitors. You don’t have to analyze them all; it might be useful to group them by a certain feature, such as location or price point, and analyse them as a lot. What are the key success factors in each category? Are any of them targeting the same customers as you? How adequately do their substitute products fulfil the need or want that your product satisfies?
However you choose to evaluate the substitutes in your industry, it’s important not to neglect their existence – because when they start taking your customers away, you’ll need a strategy to win those consumers back. And if you don’t see it coming, it’s much harder to react!