3.6: Independent, Complement, and Substitute Goods and Services

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Most of the action in business involves not just the product line, but also the markets for related products and services. There are three key concepts related to product and service differentiation and the type of related goods being offered; they are independent, substitute, and complementary goods and services.

Two goods are independent if their consumption or use is not related. The use of toothbrushes, for example, is not related to the consumption or use of motorcycles. Independent goods are goods that are not dependent in any way on how the other good is used. Since demand for one does not affect the demand for the other, product differentiation has little impact on these types of product trade-offs.

Much of the interesting economic activity in terms of strategy and differentiation comes from complementary and substitute products and services. Complementary goods are typically used together. When the demand for one rises, for example, burgers, it leads to a rise in demand for the other product, for example, fries. Examples of complementary products and services include toothbrushes and toothpaste, PCs and monitors, travel services and global positioning systems, console game systems and broadband demand, and operating systems and business applications suites. In the case of Joan’s jewelry boxes, a complementary good would be an expensive wood polish to maintain the wood or perhaps a limited line of earrings that could be placed in the jewelry box as part of a gift.

Substitute goods are goods that are alike. In other words, substitute goods have an equivalent function and one substitute good can be consumed or used in place of another. They are largely interchangeable and when the demand for one substitute increases, the demand for the other good decreases. Examples of substitute services include cable systems and satellite systems. Although they work very differently, they can be effectively substituted for one another. Other examples include margarine and butter, satellite phones and cell phones, powdered and liquid laundry detergent, and CDs and MP3 files. None of these products are actually perfect substitutes because they all have slightly different features and have different performance characteristics. A perfect substitute works essentially the same way and has the same features and qualities as another technology. In practice, many competing technologies are imperfect substitutes. MP3 files are imperfect substitutes for CDs because CDs produce better sound than MP3 files. However, MP3 files are smaller and more easily copied than CDs. Butter and margarine are slightly differentiated in terms of taste and the way our bodies assimilate these two fats. In the case of Joan’s jewelry boxes, product substitutes would be any jewelry box or container that could be used to house jewelry. This would include a plastic food storage container, a vase, or even a glass.