Threat of substitute products

Cooperatives March 07, 2011 Print Friendly and PDF

Author: John Park, Texas A&M University,

In the context of this analysis, substitute products are products in other industries that can potentially affect the demand for your own product (“product” should be interpreted to include services as appropriate). In general, the more substitute products that are available to the customer, the more difficult it becomes for firms to raise their prices. The degree of difficulty will depend on how easily one product is substituted for another in the mind of the customer.

Thus, the strength of competitive pressures from substitute products depends on three factors: Whether (1) substitute products are attractively priced and available; (2) buyers view the substitutes as comparable when analyzing price, quality, performance and other attributes; and (3) buyers can easily switch to substitutes. For example, cotton producers are in head-on competition with the makers of polyester fibers. Competitive pressure from this cotton substitute will increase as the price of polyester relative to cotton decreases, its characteristics are improved to match the more desirable characteristics of cotton and the user’s cost of switching from one product to the other is lowered. Unfortunately, in agriculture, many products are viewed as commodities with little brand distinction and low switching costs.

Your Turn …

  • List your cooperative’s products and services alongside substitute products and services.
  • How closely are these products and services substituted for one another?
  • Is there anything you can do to: (1) make it more difficult for customers to switch products to a substitute, or (2) differentiate your products and services (say through the addition of new features or characteristics), making them less comparable?

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.