One of the factors that can determine a business’ success is how well they navigate competition. A way to be proactive and stay competitive is by planning ahead for customer’s needs. This often means anticipating products or services they may need and offering them alongside existing products. A way to do this is by the provision of complementary goods.
What Are Complementary Goods?
Complementary goods are ones where their demand is directly correlated with another good’s demand. Another way to look at it is that complementary goods are paired or sometimes rely on one another to meet customer needs.
An example of a complementary good is the filter for a water filtration system. Since the dispenser system won’t work without the filter and it needs to be replaced periodically, customers are usually willing to pay for the filters. In this case, the use of a dispenser filter system drives the demand for filters. Another example would be mobile phones and a phone cases.
It’s also essential to know that not all complementary goods rely on each other; some just complement one another. For instance, if a brand sells both bread and butter and the price of butter goes up, a consumer may use bread without the butter. While butter complements bread, it isn’t a necessity.
What Are Substitute Goods?
In the event that demand for complementary goods declines, consumers may look for a substitute good instead. Substitute goods are similar products that are more attractive to a customer for multiple reasons. Some of those reasons could include a more competitive price, availability, or better quality.
Substitute goods may fall into two buckets: perfect or imperfect. While perfect substitute goods are identical to the original item the consumer is substituting, imperfect substitutes have more conspicuous differences.
The demand for substitute goods usually increases when the price of the original goods go up. Consumers who can’t afford to pay the price increase typically seek out an alternative.
Examples of substitute goods include butter and margarine, tuna and salmon, or rose gold and yellow gold.
Complementary and substitute goods have noticeable differences. The former adds value to consumers by complimenting another good, while the latter are alternative goods for consumers. The main difference between the two is that while complementary goods are consumed together, substitute goods are used in place of one another.
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