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A substitute is a different thing that does the same job; its full cost to the customer — price plus time and hassle — sets a ceiling on what the business can charge, and the ceiling less the contribution needed caps what a job can cost to do.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will tell substitutes from direct competitors, price a substitute at its full cost to the customer with time included, work out the price ceiling it sets and the cost target that follows, and find the prices at which the business still wins.
The customers course showed that customers choose among alternatives, doing nothing included. Strategy takes the same idea further: some alternatives are not competitors at all, and they limit what the business can charge. You already know how to add costs and take a contribution off a price; this lesson uses both from the customer's side.
| Term | What it means |
|---|---|
| Direct competitor | A business selling the same kind of thing. |
| Substitute | A different product or behavior that does the same job for the customer. |
| Full cost to the customer | The substitute's price plus the time, travel and hassle of using it. |
| Price ceiling | The price above which the substitute becomes the customer's cheaper choice. |
| Cost target | The most a job can cost the business, given the ceiling and the contribution it needs. |
Northside Repairs does not only compete with other repair shops. When a customer's toaster breaks, the real alternative is a new toaster. If one costs 30 dollars, and a trip to buy it costs the customer about 10 dollars of time and fare, the replacement's full cost to them is 40 dollars. A repair priced above 40 loses — however skillful, however much better for the planet — because the customer can get the same job done for less.
$$\text{price ceiling} = \text{substitute's price} + \text{what else it costs the customer}$$
The ceiling also sets a limit on the business's own costs. If Dev needs each repair to earn 15 dollars of contribution, a toaster repair can cost him at most 40 − 15 = 25 dollars in parts and time; a repair that would cost more is not worth offering at any price the customer will pay.
Every business has substitutes. Neighborhood Kitchen's team lunch competes with supermarket meal deals and lunch out. Bright Home Cleaning's weekly clean competes with a robot vacuum and a chore schedule. Maya's cups compete with factory cups with a printed pattern — and with takeout cups. Owners often do not see these as competition, which is exactly why they are dangerous.
Another way: table
Substitutes for the five businesses.
| Business | Job | Substitute |
|---|---|---|
| Northside Repairs | A working appliance | A new one |
| Neighborhood Kitchen | Feed the team | Meal deals, lunch out |
| Bright Home Cleaning | A clean home | Robot vacuum and a schedule |
| Maya's Ceramics | Cups that look good | Printed factory cups |
| Monica's Market Stall | The week's vegetables | Supermarket delivery |
Another way: steps
Name the job, not the product. A customer does not want a toaster repair; they want toast in the morning. Naming the job opens the list of substitutes: a new toaster, a toaster borrowed from a neighbor, a pan on the stove.
Ask customers what they would do instead. The question 'what would you have done if we were closed?' produces the substitutes in the customers' own words, including the ones the owner would never think of.
Price each at its full cost to the customer. The price, plus travel, plus time valued at what the customer says an hour is worth, plus any risk or hassle they mention. A customer who values an hour at 20 dollars and spends half an hour on a trip has added 10 dollars to the substitute.
Read the ceiling and the cost target. The cheapest substitute's full cost is the ceiling; less the contribution the business needs, it is the most a job can cost.
Check the ceiling against what happens. If customers accept quotes well below the ceiling and walk away from quotes above it, the ceiling is right. If they walk away well below it, a substitute is missing from the list or its full cost is lower than the owner thinks.
Customers do not pay for substitutes in money alone. The stall that saves a shopper 3 dollars on a basket but costs a 30-minute trip is dearer, for a shopper who values an hour at 12 dollars, than a delivery with no trip at all: the trip costs them 6 dollars. For a retired shopper who enjoys the market, the trip costs nothing, and the stall wins easily.
This is why the same substitute is a strong threat for one customer group and none for another, and why a position chosen for the right group can survive a cheaper substitute. It also points to the cheapest response: cut the customer's time rather than the price. Monica's pre-packed weekly bag, ready to pick up in a minute, shrinks the trip's cost without giving away a cent of contribution.
Substitutes change. When new boots fall to 45 dollars online, a 70-dollar resole loses most customers overnight — not to another cobbler, but to the substitute. The response is not to raise the price to make up for fewer jobs, and not to blame customers. It is one of three things: focus on the customers for whom the repair is still worth more (boots that cost 300 dollars new), find a cheaper way to deliver the job so that it fits under the new ceiling, or change the offer so it does something the substitute cannot.
Check the substitutes whenever the position is reviewed. A price comfortably below the substitute's full cost has room; a price close to it is fragile, and one above it is already losing customers the owner never sees.
Some of the strongest substitutes are behaviors. Doing without is one: a café that finds its cakes too dear simply stops selling cake, and Maya's customer is not another potter but the empty shelf. Doing it yourself is another: the tenant who cleans the apartment on a Sunday, the office worker who brings a packed lunch. These substitutes cost the customer mostly time, so their full cost rises and falls with how busy the customer is — which is why cleaning services sell best to people with long working hours, and catered lunches to teams with short breaks.
A business cannot out-price doing without. It can only make its offer clearly worth more than the time the customer would otherwise spend, and aim it at the customers whose time is shortest.
A business can do three things about a substitute, and each has its arithmetic. It can lower its price below the ceiling, which costs contribution on every sale, including the sales to customers who were never going to switch. It can lower the customer's other costs — the trip, the wait, the hassle — which often costs the business little: a drop-off box, an online booking, a pickup time. Or it can change what it offers so that it does part of the job the substitute cannot, which raises the ceiling itself: a hot lunch served at the meeting is a different job from a sandwich fetched from a shop.
The three are not equal. A price cut is the easiest to copy and the hardest to reverse, and a rival with lower costs can always go further. Cutting the customer's time is cheap and specific to the business's own way of working, so it lasts longer. Changing the offer is slowest but moves the business out of the substitute's reach altogether.
Work each out before choosing. A café that loses lunch customers to meal deals could cut its price by a dollar a lunch, at a cost of a dollar on every lunch it sells; or it could offer ordering by message the day before, so that lunches are ready when the office worker arrives, which costs almost nothing and takes the waiting out of the customer's full cost. The second answer usually wins, and it is the one owners reach for last, because the price is the only lever they can see from inside the business.
The same thinking applies to the business's own costs. When a substitute pushes the ceiling down, the cost target falls with it, and the question becomes whether the job can be done for less — a different part, a shorter method, a bench job instead of a house call — rather than whether the owner can bear to work for less.
An appliance repairer in a mid-sized town priced every call-out at a flat 85 dollars plus parts, and found that microwave jobs had almost vanished. Customers were not going to a rival; they were buying new microwaves, which cost about 90 dollars and arrived the next day.
She worked the ceiling. A new microwave cost 90, plus about 15 dollars of the customer's time to order and install and get rid of the old one: a full cost of 105. Her typical microwave repair — call-out plus a 30-dollar part — came to 115. It was above the ceiling before the customer even picked up the phone.
She did not lower her call-out fee for everything. Instead she worked backward: to earn her usual 40 dollars of contribution below a 105 ceiling, a microwave job had to cost her at most 65. A drop-off service — customers bring the microwave in, and she repairs it on the bench in 25 minutes with no drive — cost about 50 including the part. She priced drop-off microwave repairs at 79, well under the ceiling, and kept the call-out service for dishwashers and ovens, whose new price of 600 and up left a ceiling far above her fees.
Economists measure how much demand for one product changes when the price of another changes; a large response means the two are close substitutes. For a small business the practical version is simpler: ask customers what they would do instead, price it the way they would, and keep the answer beside the price list.
Our competition is businesses like ours. Substitutes do the same job by other means.
A better service can charge whatever it likes. Not above the substitute's full cost.
Compare only the substitute's price. Add the time and hassle it costs the customer.
When the ceiling falls, raise prices. That loses the remaining customers faster.
The ceiling only limits the price. It limits the cost of doing the job too.
Name the job.
$\text{the week's vegetables with little effort}$
What the shopper wants done.
Price the stall's basket.
$40$
Plus a 30-minute trip.
Price the trip for a shopper who values an hour at 12.
$0.5 \times 12 = 6$
Time is part of the cost.
Compare full costs.
$40 + 6 = 46 \text{ against a } 43 \text{ delivery}$
For this shopper the delivery wins.
Shrink the trip instead of the price.
$\text{a pre-packed bag ready in a minute}$
The stall wins again without a discount.
Read the substitute's price.
$30$
A new toaster.
Add the customer's trip.
$30 + 10 = 40$
Time and bus fare.
Read the ceiling.
$40$
The most the repair can be priced at.
Take off the contribution a repair needs.
$40 - 15 = 25$
The most the repair can cost to do.
Compare with a typical toaster repair.
$\text{a 12 dollar part and 20 minutes at 36 an hour} = 24$
Just under the target.
Decide on the price.
$\text{offer it, priced at 38}$
Below the ceiling, above the cost.
Name the job.
$\text{feed a team of ten at a meeting}$
What the office manager wants done.
Price the meal-deal substitute.
$10 \times 6 = 60$
Ten supermarket deals.
Add the time it costs.
$\text{one person, 40 minutes, at } 30 \text{ an hour} = 20$
Someone has to fetch them.
Find the ceiling.
$60 + 20 = 80$
For ten people.
Compare the kitchen's price.
$10 \times 9 = 90$
Above the ceiling on money and time alone.
Add what the meal deal does not do.
$\text{hot food, served at the meeting}$
A job the substitute cannot fully do.
Aim the offer.
$\text{meetings where a hot lunch matters}$
Where the substitute is weakest.
Spread the vacuum's price over its life.
$300 \div 3 = 100 \text{ a year}$
About 2 dollars a week.
Name the part of the job it does.
$\text{floors between cleans}$
A substitute for part of the service.
Name the part it cannot do.
For Neighborhood Kitchen's catered team lunch, sort each alternative.
| Direct competitor | Substitute | |
|---|---|---|
| Another catering company | ||
| A supermarket meal deal each person buys | ||
| The pizza place that delivers | ||
| A team lunch out at a restaurant |
Complete the worked solution: a new coffee grinder costs $44$ dollars, and buying one takes the customer about $3$ hours, which they value at $15$ dollars an hour. Northside Repairs charges $58$ to fix the old one. Check the repair against the substitute.
Price the customer's time.
$3 \times 15 =$ t
Hours times what an hour is worth to them.
Add it to the substitute's price.
$44 + (\text{time}) =$ c
The substitute's full cost: the ceiling.
Take the repair's price from the ceiling.
$(\text{ceiling}) - 58 =$ m
The room below the ceiling; below zero, the repair loses.
Read the room.
$\text{large room: safe; small or negative: fragile}$
A price near the ceiling loses customers quietly.
Ask customers for their own figures.
$\text{what would you do if we were closed?}$
The substitutes and their costs come from them.
A customer's toaster has broken. A new one costs $45$ dollars, and the customer reckons a trip to buy it costs them about $12$ dollars of time and bus fare. What is the most Northside Repairs can charge before a new toaster is the cheaper choice for this customer?
Answer:
Which of these is a substitute for Bright Home Cleaning's weekly home clean?
A shopper can buy the week's vegetables at Monica's stall for $30$ dollars, which takes a $30$-minute trip, or have the same basket delivered by a supermarket for $36$ with no trip. The shopper values an hour at $15$ dollars. Fill in the comparison, in dollars.
| Amount | |
|---|---|
| Value of the trip's time | |
| Stall's full cost to the shopper | |
| Delivery's full cost to the shopper | |
| Stall's advantage |
A new kettle costs a customer $31$ dollars plus about $17$ dollars of time and fare to buy. Northside Repairs needs each repair to earn at least $16$ dollars of contribution. What is the most a kettle repair can cost Dev to do, in parts and his time, and still be worth offering?
Answer:
A shoe repairer charges $72$ dollars to resole work boots. Similar new boots now cost $50$ dollars online, plus $5$ for shipping. A resole costs the repairer $22$ in materials and time. Fill in the figures, in dollars.
| Amount | |
|---|---|
| Ceiling set by new boots | |
| Current price above the ceiling | |
| Contribution if priced at the ceiling |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
A customer can replace a broken kettle for $46$ dollars, plus about $9$ dollars of their time to buy it. For which repair prices $p$, in dollars, is repairing the cheaper choice for them?
This task has no paper form; do it on a device.
You can name the substitutes a business faces and the ceiling they put on its price and costs. Tell someone why a better repair still loses to a cheaper replacement. Next: reading local market evidence.
16. Your turn: Bright Home Cleaning and the robot vacuum, step 3
$\text{kitchens, bathrooms, surfaces}$
Where the offer should focus.