1. Shopper & Customer

Product Substitution: How Savvy Retailers and Manufacturers can Build Supply Chain Resiliency, Reduce Costs and Improve Customer Experiences

When customers place ecommerce orders, the last thing they want is an unhappy surprise. Shipping delays and stockouts lead to frustration and disappointment, especially when logistical problems impact time-sensitive purchases, such as special occasion gifts, event tickets or prescription medications.

The letdown customers experience when their orders don’t arrive on time, or at all, results in uncertainty and distrust that’s difficult — if not impossible — to remedy. Retailers can expect that customers will turn to other vendors; once this happens, they’ve lost both the sale and the customer’s trust and loyalty.

Subsequently, when a customer order is out of stock or delayed, omnichannel retailers are offering product substitution, which refers to suggesting a similar alternative when the specific products customers originally ordered are unavailable. Applying this practice, retailers can proactively troubleshoot stockouts and delays to ensure that customers’ orders can still be fulfilled to their satisfaction in a timely manner.

In manufacturing, product substitution can be a valuable tool for optimizing inventory management. When a component or material becomes scarce or expensive, substituting a readily available alternative keeps production schedules on track while reducing costs. Furthermore, product substitution allows businesses to diversify their sourcing to mitigate supply chain risks.

Market conditions are dynamic, and consumer preferences change — retailers and manufacturers need to adapt to these factors quickly. Product substitution capabilities ensure they can respond to demand shifts, consumer trends and emerging technologies.

Successful execution of product substitution depends on several key factors: delivering functional equivalence to the original product, improving product quality, ensuring price alignment, having real-time visibility into inventory management and customer behavior, and upholding customer experience standards. 

Meeting Customer Expectations

In some cases, customers who receive product substitutions that are functionally equivalent to the original item ordered will be satisfied, provided the replacement serves the same purpose and need. For example, if a customer ordered a certain brand of paper towels, substituting an alternative brand of equal quality and price is an acceptable solution.

In other instances, customers might expect an upgrade for their trouble. If an airline has oversold a flight and a passenger’s reserved seat is unavailable, that passenger will likely be satisfied if moved to a seat of higher value or comfort. When flights are delayed or canceled, many airlines provide access to luxury airport lounges or offer a travel voucher as compensation.

For situations in which customers are purchasing a low-end product option to the point of inventory depletion, retailers can substitute an upgrade to the premium option. For example, a kitchenware and cutlery company might offer two grades of knife sets. If customers are purchasing the less expensive set at high volumes and demand is about to surpass supply, the company can substitute the premium product to keep the sale and delight the customer. Successful execution of this tactic requires maintaining distinct SKUs for both grades.

Building Product Substitution Policies

Ultimately, satisfaction hinges on whether product substitutions meet customers’ needs and expectations; subsequently, the alternative product must be perceived as equivalent or better than the original selection.

Whenever possible, retailers should price match the cost of the original item. If price matching isn’t possible, customers should receive an alert prior to finalizing the substitution. Establishing clear criteria for selecting substitute products that align with the price and quality of the original involves various factors, such as product category, features and consumer preferences.

Some retailers offer tiered substitution options that provide customers the flexibility to choose the level of substitution that best fits their budget and preferences. They also offer discounts, promotions, free shipping and other value-added services for substitute products to make them more appealing.

Soliciting feedback on customer satisfaction with substitutions helps retailers refine their policies and pricing. Survey data reveals that nearly half of cart abandonments are attributed to unexpected costs, such as shipping, upcharges and other fees; therefore, it’s imperative to strike the right balance — the less friction in the sales cycle, the better.

Realizing the Benefits of Product Substitution

Implementing product substitution requires real-time inventory data and demand forecasting algorithms to keep track of product availability, as well as defined criteria for execution, to ensure the preservation of customer experience standards. Retailers that do this well can achieve significant advantages:

Reliable revenue protection: Providing substitutes for unavailable or low-stock items empowers retailers to prevent lost sales and ensure that their customers will receive their orders without delays or cancellations. Keeping customers satisfied with suitable substitutions leads to higher retention and incremental sales. Instead of offering discounts or refunds for out-of-stock items — which erodes profit margins — retailers can preserve the original order value and revenue while meeting order commitments at initial or closely aligned prices.

Improved customer experience: When customers place an order and receive a suitable substitution in place of an out-of-stock item, their expectations are met; this prevents the disappointment associated with a canceled order or a delay due to unavailability. Consistently offering suitable product substitutions helps build trust, and customers are more likely to remain loyal to a retailer that takes proactive steps to meet their needs. This customer-centric approach demonstrates that the retailer prioritizes going the extra mile, which builds a positive brand perception.

Optimized fulfillment: Product substitution prevents backorders that result in customers waiting for an item to become available again; instead of leaving orders pending, retailers can fulfill them immediately, which improves efficiencies. Using substitution tactics, retailers can recalibrate inventory levels. When a high demand product runs out of stock, it can be substituted with a similar product that is not selling as fast to maximize inventory turnover, reduce carrying costs and minimize the administrative burden associated with cancellation, refunds and follow-up.

Streamlined inventory management: Leaner inventories reduce holding costs; however, retailers must be resourceful when planning for product availability. Substituting identical products with different UPCs allows them to efficiently use existing stock, preventing overstock and understock of variants. In cases where a specific UPC is out of stock but an identical product with a different UPC is available, substitution ensures that customers can still purchase the item.

Stronger supply chain resiliency: Proactively maintaining lists of substitute products empowers retailers to switch to product substitutions on demand, which helps address the challenges of supply chain disruptions. Retailers can diversify their inventory; when one option becomes unavailable due to supply chain issues, they can swap in another, which minimizes the risk of stockouts. Matching key attributes for product substitution, such as quality, price, functionality, and customer preferences, ensure that customers experience a consistent shopping experience.

Effective product substitution strategies build customer trust, optimize operations and drive incremental revenue. By prioritizing customer satisfaction, consistency and adaptability, businesses can ensure supply chain resilience and improve inventory management. This customer-centric approach leads to reliable revenue protection, enhanced customer experiences, efficient processes and long-term customer loyalty, elevating businesses and driving success in retail and manufacturing industries.

Madhulika Saxena is the Director of Product at Kibo, a composable commerce platform designed to simplify the complexities of delivering modern customer experiences that span order management, ecommerce and subscription services. She has over 15 years of experience in leading product innovation for enterprise software solutions in the retail industry. Saxena’s previous product experience is in building retail planning solutions at Blue Yonder. She holds a master’s degree in software engineering from the University of Scranton, Pennsylvania.

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