Substitute Products

A substitute product is any alternative, replacement, or backup of primary goods in the market. In other words, it relates to any artifact, commodity, or combination of goods that would act as a replacement or alternative of a more popular item in normal circumstances.

People buy such kinds of goods because they can be used without noticeably affecting the  composition, appearance, or usefulness.  . Thus, the consumer can use the substitute for the same purpose as the original product because they are comparable and similar in nature and handle the need that the original product can.

• A substitute product means a primary goods alternative, backup, or replacement. It is related to any antiques, a combination of goods, or a commodity that, in typical situations, would be a more popular item alternative or replacement without affecting the appearance, composition, or the resulting product utility.
• The factors that affect the demand for substitute products are price, quality, shifting cost, and availability.
• The advantages of substitute products are competition, price, and variety.
• The disadvantages of substitute goods are the availability, quality, and high marketing costs. 

Substitute products and services are the ones that give the same service, look and feel as the original. The consumer perceives both to be very closely comparable because they serve the same purpose.

Substitutes are the reason which motivates corporates for continuous product developments to bring out unique variants in the market with better quality and standards but at reasonable prices, thus providing better customer satisfaction.

The impact of availability of substitute products is explained in macroeconomics. All these are governed by the concepts of demand and supply and their relationships with price and costs. The implications of substitutes are both on the market and producers.

The consumer population comprises various consumers with different moods, tastes, requirements, and demands. Therefore, if more substitutes exist, each producer’s share reduces because more brands target the same population. Furthermore, the market becomes cost-sensitive if there are many substitutes available. As a result, the consumer population tends to shift brands, even for minor price changes. Due to these factors, companies try to discover various innovative techniques to reduce the costs of products to maintain market share.

One of these techniques is often compromising quality to lower prices. On the other hand, if there are fewer substitutes, the situation turns favorable for the producer, and there are chances of creating a monopoly.

1. Price: The price of popular products understandably plays a vital role in determining the demand for substitute products. Primarily if substitute products and services are priced, as per the age-old law of economics, there is an inverse and intuitive relation between price and demand.
2. Shifting Cost: Shifting cost refers to the additional cost of production that would have to be incurred for moving from primary good to a substitute good. If this cost is high, the demand for substitutes will decrease, and vice versa.
3. Quality: If substitutes provide better quality (even at a high price), the consumer tends to shift from the primary product to the replacement. Thus, resulting in increased demands for substitutes in the economy.
4. Availability: If the availability of substitute products are more than the primary product and easily accessible to the end-user, then the demand for substitutes increases compared to the primary product and vice versa.

Some major examples are as follows:

#1 - Coca-Cola And Pepsi

Undoubtedly, the best example of substituted products is the biggest rivalry of the 19th century – Coke and Pepsi. However, if the available factors are distorted, like availability or price, demand shifts.

Consider the diagram below, which shows the economic possibility that when the price of Coke increases, there is a shift in the quantity consumed. This decrease in quantity is substituted by Pepsi's corresponding increase in its substitute product.

#2 - Mc Donald's And Burger King

Both these products are famous burger giants popular across the planet. Although both the products are different in terms of market share, they are consumed interchangeably by the consumers. Effectively, it means that the consumer prefers the other without one.

The substitute products in economics may face the following threats.

1. Distinctive Nature: The primary good might be offering some unique features or additional benefits along with the product, which is difficult for a substitute to replace. It can be hidden or evident in effect.
2. Value: If the substitute is available for less or more or less of the same value as the basic product, it acts as a threat to the primary commodity. If the substitute is available for a higher value than the primary product, it becomes a risk for a substitute because it becomes difficult to penetrate the market.
3. Brand Conscience: It is difficult to target the brand's loyal customers.

The substitute products in economics have the following advantages.

• Variety: There will be a variety in the market for end-users to choose the best product per their fulfilling needs. Type helps the end-users judge the product better, allowing companies for better product developments.
• Competition: Substitutes are a reason for a healthy market fight among product competitors, which results in the best product quality for consumers. Thus, benefiting the consumers, avoiding monopoly in the market, and justifying the phrase “Customer is a king.”
• Price: Substitutes indirectly control the costs because customers would conduct a  cost-benefit analysis before purchasing a product. The competitors tend to maintain prices to increase sales and not lose them to substitute products business ideas.

The substitute products business ideas have the following disadvantages.

• Quality: In places where the customer population is cost-conscious and ready to compromise on quality for relatively cheaper products, it is challenging to retain customers because even for minute price variations, a consumer may move to substitute goods, thus making it difficult for primary goods producers.
• Availability: In cases where the availability of substitutes is quite convenient compared to primary items, it is difficult for the market of primary goods to survive.
• High Marketing Costs: For retaining customers, the corporates may incur high investments in the marketing of the product. These costs are incurred to attract more and more customers and capture the maximum possible market available for the product. That, in turn, leads to an overall increase in the cost of the product without giving any additional value to the product.

This article is a guide to what are Substitute Products. We explain them along with examples, threats, factors affecting demand, advantages & disadvantages. You may learn more about financing from the following articles: -

• Price Fixing
• Complementary Goods
• Prestige Pricing
• Determinants of Demand