What is the threat of substitutes within Porter’s five forces model?

Porter’s five forces model

  • Threat of entry
  • Bargaining power of suppliers
  • Bargaining power of bias
  • Intensity of rivalry
  • Threat of substitution

Real word examples

  • Mobile phone is a substitute for a landline phone
  • social media substitute for newspapers.
  • Zoom conferencing is a substitute for a train ride
  • Bicycles and cars
  • Supermarket food or restaurant
  • Going out bowling or video games
  • Kicking the ball around at the park or FIFA21
  • Apple music or a live performance
  • Bottled water versus tap water
  • Hotels or Airbnb
  • Airline flights to staycations
  • DVD purchase or Netflix and other view streaming

Lower threat

A customer chooses to purchase the substitute instead of your product

The threat of substitutes — Determining factors

  1. Are switching costs low, meaning there is little if anything is preventing your customer from purchasing the substitute product/service to the determent of your own offering.
  2. Is the alternative offering cheaper than your industry’s product or service? Does this place price ceiling to prevent you charging what you want to for your services?
  3. What about the quality of their offering? Is it as good or better than what you can offer? If so, the threat of substitutes is high.
  4. What if the attributes, functions, or performance of the substitute product are equal or superior to the industry’s product? You may have a high threat of substitutes to cope with, and your current profit potential is under danger.

More expensive alternative

Analysis

High and low threat

Summary

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