The Five Forces of the Porter Model: Threat of Substitutes

This is the fifth in a series of articles about the Porter Five Forces Model for Market Positioning. This article is preceded by an article with the title "Porter's Five Forces Model: Buyer's Power" by the same author. To best comprehend the context of this article it is advised to first read the preceding articles in this series.

In this article the threat of substitutes entering the market will be discussed. A substitute is something that can take the place of your product without impacting on the satisfaction of the customer as it is a complete replacement.

The threat of a substitute is present if there are alternative products available to the customers that can satisfy the need of the customer at prices better that the existing products or if these products can better satisfy the required performance parameters of the clients for the same or a better price. As a result of this the opposition could potentially draw a considerable percentage of the market segment and thus drive down the prospective sales volume of existing market proponents.

The treat of substitutes also includes the potential of buyers switching to complementary products. A complimentary product is a product for which the demand is related to another product in such a manner that an increase in the price of the first product will cause a shift in the demand for the other product. In other words, less of the primary product will be demanded at any given available price of the complimentary product. This is particularly important in situations where the two products are commonly consumed or used together in relatively fixed or standardized proportions to one another.

The Five Forces

Porter identified five dynamic forces that have an effect on all industries as well as markets and market segments alike. According to the model that Porter developed the forces influence the amount of competition in the market and as a result the potential profitability and appeal of the industry. The strategy should be to control and adjust the competitive forces in favor of the organization in order to maximize the profitability.

Threat of Substitutes

The threat of substitutes is a factor that is more than just a theoretical concept. It influences all the aspects of the marketing mix (product, price, place and promotion) and directly limits the profit potential of a market. Times of economic change are particularly important in respect of this threat as it accelerates the possibility of customers of switching to substitutes. On the upside it also creates opportunities whereby new customers can be lured into your market segment.

Analyzing how Michael Porter explained the threat of substitutes in his Five Forces Model, the primary factor is that substitutes place a upper limit on the price a market and thus companies within the market can sustainable achieve.

It is a fact that there are different ways in which a customer can satisfy any particular need. The choice that customers have to satisfy a particular need can be satisfied by a variety of products or services that is available in the market. Customers will consciously or unconsciously compare price and benefit based on their particular main buying motive and make procurement decisions. The final decision is the manifestation of the tread of substitutes.

One of the crucial issues that companies have to deal with continuously is the willingness of customers to switch between different products. This inclination of customers is often influenced by the ease of comparison between the different products or services. From a marketing perspective the companies will try to maximize the differentiation of their product by highlighting a factor or benefit that is believed to have the ability to attract the maximum number of buyers.

Product differentiation is generally speaking the development or incorporation of attributes such that customers in a product's market segment will perceive to be different and desirable from other products. Advertising and promotion of a product is based on its differentiating characteristics to enhance this perception and can include attributes such as benefits, price, quality, style, design, support service, value etc. The aim is to make the comparison with substitute product more difficult.

Conclusion

In conclusion the threat that substitute products pose to a company supplying a particular product depends on the comparative price-benefit relation of the available products or services to which customers can switch to satisfy the same fundamental need. This decision will be influenced by the switching costs, the inclination of the buyer to substitute and the trade-off of the substitute and the original product.

The decision to switch also includes considering product for product substitution that is based on the substitution of one need for another. It further includes generic substitution and finally it can be the substitution that relates to something that people can do without.

This article is followed by another article with the title "The Five Forces of the Porter Model: Tread of New Entrants" by the same author.

© Carl Marx