When I look at customer’s business models there is often a disconnect between how unique they think their core products and services are and how easy customers think it is to substitute. A good example is dahmakan, a food delivery startup in Malaysia (who I once worked for). They provide meals to your office freshly cooked by a 5 star chef. It’s an unique service. No one else does anything similar in Malaysia. Except…. except that people bring their own lunch into work, go out to restaurants, order food deliveries, skip lunch or pig out on chocolate bars and crisps. Not so special. In this article I’m going to look at the threat of substitutes to your business model and why it is important to think widely.
What are the Customer’s Problems?
When we test business models the first step is to go back to the drawing board and look at the problem or problems that the customer wants to solve. We use the problem as the foundation for identifying substitutes not your product or service. Why do we do this? We do it because most of the time the customer decides between different options based on his interests. He doesn’t look at products and services the same way what you. Your marketing, R&D and manufacturing teams do. She doesn’t look at them the same way that your competitors do.
Your customer has their own perspective. Sometimes they may be fuzzy about what exactly the problem is and how it should be solved. Even then they approach everything quite differently to you. So we start with the problem. Then, putting ourselves in the shoes of the customer we ask how can we solve this.
Brainstorm Different Substitutes
Because we are looking for substitutes, this after all is part of our threat analysis, we want to be open in our thinking and not close off potential avenues. The less we see the more risk we have. A brainstorming methodology works well here.
A good example is the problem of getting to work. Let’s imagine that we are a car maker whose main product line is a range of family saloon cars. We can call it Toyota.
What other ways are there to get to work other than by using a Toyota? To start with we can look at the range of other cars produced by competitors. Then we can add in the electric cars. Thats a distinct substitute product that will disrupt much of the manufacturing and supply chain. Whilst we are thinking about it let’s add in autonomous vehicles as they start to break the emotional bond between car and driver that marques have relied on for decades.
Then there are a range of substitute forms of transport – bicycles, buses, trains, metros. These can be incredibly powerful threats. When the channel tunnel rail link opened between London and Paris it destroyed the viability of the airline routes between the to cities.
Alternatively we have substitutes in the form of taxis, and increasingly in ride sharing services such as Uber and Grab or micro rental car ownership schemes.
Finally we have options where we don’t even move the person but we move her office into her home, such as in remote working. Alternatively we move the home to the office as people migrate back to city centres. With the dense networks of services there is little practical need for a car.
That gives you a wide range of substitute products and services that threaten core product lines. What do you do?
Threat of Substitutes to your Business Model
The next stage is to look at each of the substitutes and evaluate the threat to your business. This can be done using a standard risk assessment matrix.
For severity we can look at 
the loss of market share, for frequency we can use the likley timescale of the change. The length of the timescale depends on the industry. Some take longer to change than others.
That said change can often come far faster than expected. The music industry’s revenues from physical products dropped from $15billion in 1998 to $5billion in 2008. In 2004 not a single car survived the DARPA self driving car Grand Challenge in 2004. 15 years later autonomous vehicles are a reality on some roads in many countries.
For frequency (or likelihood) using a scale of
- <1 year
- 1 – 2 years
- 3 – 5 years
- 6 – 10 years
- 10 years plus
gives a reasonable approach.
Cognitive Blindness to the Threat Of Substitutes
One big problem here is that humans are not good at assessing risks. This is particularly true when we are assessing risks to something that we have a vested interest in. We can avoid thinking about or downgrade some possibilities because we do not want them to be true.
A good approach here is to look at the substitute threats that you rate low on either severity or likelihood. Then imagining that you are a company, or new entrant in that sector describe how you would rapidly grow the company.
Using the commuting example above let’s imagine that we’ve rated the likelihood and severity of people moving back into the city centre as a low threat to our core car manufacturing business. What is a story that would challenge that?
Here’s an example.
- Plandr, a fictional startup, develops a new social network that makes it a real competitor to Facebook
- Based in Birmingham UK it faces a critical shortage of housing for employees
- Flush with investors capital it buys up hundreds of acres of brownfield sites in the city centre
- It uses Chinese construction techniques to build 20,000 residential units in six weeks, increasing the city’s working population by 10%.
- The influx of capital and demand stimulate a rapid transformation of the city and decreased attractiveness of many outer suburbs.
- Saloon car sales in Birmingham fall by 50% in less than a year
- Seeing the success of this approach Manchester, Leeds, Sheffield and Newcastle follow Birmingham’s approach.
There are far more reasons why this won’t happen than why it will. The point is not to describe a plausible path but to stimulate insight so that threats are seen and recognised. Not ignored. It is that ignoring of threats that is one of the greatest risks to companies in the Commercial Revolution.
I hope that you have found this article on the threat of substitutes to your business model useful. Do shout out if you have any questions
