External Analysis: Porter’s Five Forces (3/5)
3st Force: Threat of Substitutes
Rethinking Competition: More Than Just Direct Rivals
We often think of competition as coming from businesses that offer the same product or service. However, there’s another, often subtler, type of competitor: substitutes.
What Are Substitutes?
substitutes are goods or services from outside your industry that fulfill the same customer need—just in a different way. For example:
- Texting apps are substitutes for SMS. Both allow users to send written messages, but they belong to different industries (software/internet vs. telecommunications).
- Streaming services like Netflix and Disney+ are substitutes for going to movie theaters.
The Threat of Substitutes: When Does It Bite?
The threat of substitutes becomes stronger when:
- When substitutes are easy to get and cheaper than ourr product, customers are more likely to switch.
- If a substitute offers similar or even superior benefits, it becomes a serious contender. Consider plant-based meats that mimic the taste and texture of traditional meat.
- If it’s easy and inexpensive for customers to switch to the substitute, the threat intensifies. The rise of streaming services over cable TV is a prime example; canceling cable and signing up for a streaming service is relatively painless.
Why Identifying Substitutes Matters
Recognizing substitutes is essential for shaping an effective marketing strategy—like pricing, positioning, and differentiation. For instance, if our product is priced significantly higher than a substitute, we may need to lower our price to remain competitive. Conversely, if the substitute is priced significantly higher than ours, we might consider raising our price to emphasize the superior value we provide.
The Key: Understand the Customer’s Problem
But how can we recognize substitutes? One way is by focusing on a core principle of marketing: understanding the customer’s problem or need. Harvard marketing professor Theodore Levitt once said, “People don’t want to buy a drill. They want a hole.” This highlights an essential insight: customers buy products to solve problems. By identifying those problems, we can develop more effective marketing strategies, including the analysis of substitute competitors.
Let’s look at an example where an institution identified its substitute competitors by uncovering customers’ true problems—and then optimized its service pricing accordingly.
In the MIT Sloan Management Review article “Finding the Right Job for Your Product,” the authors illustrate this through a case from the Chicago Architecture Foundation (CAF). Initially, CAF launched an architectural boat tour targeting affluent, highly educated individuals with a strong interest in architecture.
After a year of running the cruise, a researcher found that many passengers joined the tour mainly for entertainment, not out of deep interest in architecture. This revealed that CAF’s real competitors were other entertainment options for visitors. Since their tour was relatively cheaper than other entertainment options in Chicago, CAF raised its prices to reflect its true value.
This example illustrates that by identifying the real problem customers are trying to solve, we can build more effective marketing strategies and, of course, more accurately analyze substitute competitors.