A substitute is a product or service that satisfies the same need in a different way. A threat of substitutes exists when a product’s demand is affected by the price change of a substitute product. A product’s price elasticity is affected by substitute products –as more substitutes become available, demand becomes more elastic since customers have more alternatives.
Many substitutes may be overlooked because of their different nature, as they are not direct competitors. They limit the industry’s profitability by pressing the product prices, just as another competitor would. There is a high threat of substitutes when:
- The substitute product or service offers an advantageous price-performance relationship compared to the industry product
- There are little or no switching costs associated to the substitute product or service.
Strategists should monitor all the potential substitute industries’ evolution, to detect changes that may turn these potential substitutes into attractive alternatives due to a price downturn, emerging risks concerning security or health issues, a crisis diminishing the buyer’s available budget, or new entertainment trends, for instance. In the tourism industry we consider substitutes –in most cases- those other tourism sectors that may satisfy the same or similar needs.
For instance, we consider that two ski resorts are competitors, but a rural villa or a golf resort is a potential substitute as long as it satisfies the need for vacation. Other conventional substitutes could be residential tourism with relatives or friends, or activities related to the entertainment industry. However, sometimes the substitutes may come from technological industries, such as video-conference services in the case of business tourism.
How would you assess the power of substitutes in the tourism industry?
