Complements vs. Substitutes: What's the Difference?

Business success depends on several factors: talent, leadership, and strategy. While many leaders can control their companies’ internal operations, there’s often little they can do to ensure the economy, political landscape, and competition act and react in their favor.

For this reason, preparation is essential in business. Whether through complements or substitutes, the right business strategy can rapidly make an impact.

If you’re interested in learning how business strategy can help you and your company adapt, here’s an overview of what complements and substitutes are, how they can benefit your organization, and why you should use them in your business model.

What Is a Complement Good or Service in Business?

According to Harvard Business School Online’s Business Strategy course, a complement is a product or service that lifts a customer’s willingness to pay (WTP) for another product or service. For instance, a printer is useless without ink cartridges, so customers with printers are willing to pay more for ink. Razor blades are another example; razors need them to work properly. Since these products rely on each other to serve customers, they’re considered complements.

Complements can be extremely beneficial when leveraged properly and encourage companies to create businesses outside their core industries. The exclusivity decision, however, is particularly important for emerging industries and product categories.

Consider electric car manufacturer Tesla, which is presented as an example in Business Strategy. While building electric car charging stations throughout the country, Tesla faced an important decision: build stations that charge every electric vehicle or only those it manufactures. The company chose the latter. By creating an exclusive service for Tesla owners, the company not only raised the WTP for its product but contributed to the slower adoption of battery-powered vehicles.

This example poses an important question all strategists should consider: Should you make two products mutually exclusive to maximize sales or allow competitors to sell complementary alternatives to your core product to increase functionality for customers and elevate the entire industry?

Industry-Specific Complements

Industry-specific complements increase a customer’s WTP for particular products and services within an industry. Using them is an effective tactic for businesses that want to boost the entire market. As HBS Professor Felix Oberholzer-Gee says in Business Strategy, “A rising tide lifts all boats.”

For example, if a company developed a simple syrup that negates the calories of any alcoholic drink it’s added to, it would likely lead to more health-conscious customers in the alcohol industry. As a result, simple syrup sales would also increase. In this example, the syrup is a non-proprietary, industry-level complement, which tends to be the most powerful for creating industry-wide impact.

Company-Specific Complements

If your goal is to gain market share, you must keep complements proprietary. Company-specific complements raise WTP for your company’s goods and create a competitive advantage in your industry.

For example, if a vodka company developed the aforementioned simple syrup to only work with its products, its vodka and syrup sales would increase. In turn, its competitors’ market shares would decrease.

What Is a Substitute Good or Service in Business?

A substitute has the opposite effect of a complement; it’s a product or service that decreases a customer’s WTP for another company’s product or service. An everyday example is technology since it’s a cost-efficient substitute for human labor.

Substitutes, however, aren’t negative “competitive replacements.” In other words, substitutes aren’t implemented to replace a failing product or service. Instead, they create value for a company by decreasing its willingness to sell (WTS) its core products. Despite the value it can offer your business, it can be difficult to discern between complements and substitutes when new technologies emerge.

Related: A Beginner’s Guide to Value-Based Strategy

One example presented in Business Strategy is the relationship between paper products and personal computers (PCs). In the 1980s, many predicted that PCs would turn most offices paperless. Yet, until the early 2000s, paper consumption nearly doubled in the United States. This increase resulted from PCs making printing easier and being more prone to crashes in their early years on the market.

Instead of being a substitute, PCs were initially complementary to printers and paper products. After the early 2000s, though, offices’ paper product consumption considerably declined. As a younger generation entered the workforce, there was increased comfort with using digital-only products, resulting in computers becoming a substitute. This example isn’t an outlier, but rather a common pattern in implementing substitutes in business.

“Relationships between products aren’t set in stone; they evolve with customer preferences and technology,” Oberholzer-Gee says in Business Strategy. “Strategists often expect substitutes to arrive much earlier than they do without considering the fact that relationships between products and services can change over time.”

How to Choose the Right Strategy for Your Business

Deciding whether to use a complement or substitute can be difficult. Choosing a value-based strategy that ensures long-term success is crucial.

“There are only two ways to create value: increase WTP or lower WTS,” Oberholzer-Gee says in Business Strategy. “Complements and substitutes help us do that.”

To aid in the decision-making process, focus first on understanding your customers’ journeys. Questions to consider include:

• What else are your customers searching for during the discovery phase?
• What competitors are they evaluating during the consideration phase?
• If they’re a returning customer, what prompted their additional purchases?

Starting with these questions can help reveal what strategy best suits your business goals and customers’ preferences.

While substitutes can be incredibly effective at lowering WTS, complements are far more prevalent in most industries—despite how difficult they are to spot. This is because complements are closely related to a business’s core products. Perhaps the most intriguing aspect of complements is that they raise customers’ WTP for your core products when they become cheaper.

For example, if coffee pods decreased in price, more people would be willing to buy a coffee machine because they perceive that pods’ future costs would decrease. Hence, the coffee machine becomes a good investment. This kind of dynamic relationship between core products and their complements creates opportunities to face lighter competitive pressures by strategically positioning your offerings for success.

Using Complements and Substitutes in Your Business Strategy

It’s not always easy to effectively use complements and substitutes because they’re often overestimated (as competitors) or underestimated (as irrelevancies). It takes business savvy to successfully spot these value creators and incorporate them into an effective business strategy.

Are you interested in learning more about complements and substitutes? Download our free e-book on how to formulate a successful business strategy and explore our online course Business Strategy.