Complementary Goods Can Reduce the Risk


 Complementary Goods Can Reduce the Risk

Complementary good is a product or a service which has only a little value or no value when it is used without another good or service which is related to it. These are complementary goods which show negative cross elasticity of demand. What is the negative cross elasticity of demand? Why organizations aware of this concept? Here the answer becomes a solution to many problems related to productivity and for investment decisions. The price and quantity demanded of complementary goods are interrelated and interdependent and linked to one another. If the price of one product increases then the price of another product also increases, in the same way, the demand of the both products increase. In the case, the price of the product increases then the demand for the complementary good decreases. Likewise, the demand increased with the decrease in the price of another product, in such cases, it shows negative cross elasticity of demand.

For example increase in the demand of mobile phones creates demand for chargers and sim cards. Here the decrease in prices of mobile phones creates demand for mobile phones as well as chargers and sim cards. Decrease in demand for chargers and sim cards is the result of an increase in prices of mobile phones. So the complementary goods create value to the related products.

The usage of the combination of these complementary goods may depend on the level of necessity and consumer’s perception. Examples of complementary goods are shoes and socks; books and pens, bread and butter, cars and wheels, vehicles and petrol, jeans and belts etc.

Investment decisions

By knowing the prices and demand variations of the complementary goods it enables managers to take investment decisions to produce a new product. The combined relationship between the complementary products tells that it is better to invest on producing complementary goods of higher demand products or if the organizations are already producing a particular good then they better to produce its complementary product. If an organization is producing water bottles then it can produce bottle cleaners or bottle cleaning brushes. In the case the decision is to be taken by a new entrant then initially they have to research the existed products prices and demands, by that it is easy to know the customer tastes and preferences then it is possible to produce goods with expected results. For example, if the demand for induction stoves is very high then it is better to invest on hard coat induction cookware.

Uses of investing on producing complementary goods:

  • Sales and demand area directly proportional in the case of complementary good, so it is easy to calculate the future sales and demand of the related good.
  • If an organization itself producing the complementary products then they can predict the market demand and price fluctuations, it enables them to face uncertainty successfully such organizations can control prices effectively.
  • There is no need to give much advertisement to the complementary products. For example, if consumers buy flashlights then it is not necessary to give additional advertisements for selling batteries, likewise boots and laces, etc.
  • Producing and marketing complementary goods together reduces the consumer’s risk in searching for the related good, so it increases the sales of that particular brand products.
  • It maximizes brand image results in the high reduction of switchovers.
  • No need to spend much on market research and analysis.
  • No barriers or very fewer barriers to entry or exit.
  • It is easy to reach the customer expectations.
  • No need to put efforts to collect customer data.
  • It is easy to predict demand and placing orders.

Challenges and Threats:

Though they are many benefits, then also risk of investing on the complementary goods is very high. The increase in the price of a product results in the decrease in demand of related product also. Managing such conditions may become a great challenge. If the product is outdated then the entire investment may become useless. New innovations bring changes in the customer preferences and tastes, in such conditions some industries may not survive due to the threat of substitute products. For example gramophone record players faced a major threat due to the invention of CD s and DVDs, so the organizations and new entrants should take investment decisions on complementary products by keeping the threat of substitute products and other threats in mind.