Explaining Complementary Products
One factor that could influence a company’s ability to capture profits from its products and services is the role that complementary products play in the value creation equation.
From an economist’s point of view, two products (or goods) are complementary if a change in the price of one moves the demand for the other in the opposite direction.
For example, if the price of DVD movies goes down, the demand for DVD players goes up, and if the price of ink cartridges goes down, the demand for printers will go up.
But the opposite is also true: if the price of DVD movies goes up, the demand for the DVD player goes down, and if the price of the ink cartridges goes up, the demand for the printers will slow down.
Because of that interrelation, complements can play an important role in your ability to make profits effectively and consistently.
For example, if the complement is unique and exclusive, its vendor could have the power to limit your ability to sell your products.
In other words, by not being available to all of your “potential” customers, the complement would put a cap on the demand that YOU are able to capture.
Let’s say a company makes coffee pods that can only be used in a particular brewing machine made by a different company.
The maker of the machine has power over the capsule vendor because it controls where and to whom the brewers are sold, and because they also grant the licenses to make the capsules, limiting the profitability that capsule makers can achieve.
This is happening in the video games industry, where the makers of PlayStation, Xbox and Nintendo and other consoles control game prices and take a cut of the games’ revenues.
Because of that, the profits that game developers can aspire to is limited by the strategy of the console makers.
Whenever you are selling a product that depends on a complementary solution in any way, you must pay special attention to how much the complement is needed to use your product, and how accessible the complement is to YOUR target buyers.
If your buyers need a complement to use your product, you must build assurances in your business model to prevent giving control of your profits to the makers of the complement.
This article has been extracted from Sun Wu’s book Strategy for Executives which can now be downloaded for free here.
Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press. Kindle Edition.
Magretta, Joan. Understanding Michael Porter: The Essential Guide to Competition and Strategy. Harvard Business Review Press. Kindle Edition.