Complements & Substitutes

You're seeing Complements & Substitutes when a cloud provider offers free credits to startups — AWS, Google Cloud, and Azure all subsidise early-stage companies. The cloud is a complement to the startup's product: more startups building more applications means more compute demand. The provider that captures the complement relationship early locks in the customer before they scale. The same logic explains why Microsoft gives away developer tools: Visual Studio Code and GitHub are complements to Azure. More developers using Microsoft's free tools means more workloads on Microsoft's paid infrastructure.

You're seeing Complements & Substitutes when a grocery store places milk at the back of the store. Milk is a complement to nearly everything else in the cart — bread, cereal, cookies. Forcing customers to walk past every aisle to reach it increases the probability they add complementary items. The store is not optimising for milk sales. It is optimising for the basket. The same logic explains loss leaders: Costco sells rotisserie chickens at a loss because chicken is a complement to the rest of the shopping trip. The chicken brings you in. The margin is in everything else.

You're seeing Complements & Substitutes when Spotify invests in podcasts. Music and podcasts are substitutes for listening time — both compete for the same ear. But podcasts are complements to the Spotify subscription: more podcast content increases the value of the monthly fee, reducing churn. The strategic move is to own both sides of the substitute relationship (competing for attention) while making them complements to the business model (both increase subscription value). Netflix does the same with games: games substitute for viewing time but complement the subscription by increasing perceived value.

You're seeing Complements & Substitutes when a company acquires a supplier or distributor. Vertical integration between complements can capture value that was previously split across the chain. Disney's acquisition of Fox added content (complement to distribution) and removed a competitor for licensing rights. The risk: regulators may treat the integrated firm as having excessive market power over complements. The opportunity: controlling complements lets you price the bundle to maximise total surplus rather than optimising each piece separately.

Identify your complements and subsidise them. If your product is a platform, the applications built on it are complements — make it easy and cheap for developers to build. If your product requires adoption of a new behaviour, the tools that enable that behaviour are complements — partner with them or build them. The mistake: treating a complement as a revenue source and taxing it. That turns a complement into a substitute — developers will build for the platform that doesn't tax them. The win: make your complements so valuable that substitutes become irrelevant. Nobody substitutes away from the iPhone because the App Store's complement ecosystem is too valuable to leave.

Evaluate moats through the complement-substitute lens. A company with defensible complements — proprietary content, exclusive distribution, integrated tools — has a structural advantage. A company whose product is easily substituted — commodity offering, no complement lock-in — will face margin compression. The best investments often sit at the intersection: a product that is a complement to a growing ecosystem (riding the tide) while having few close substitutes (defensible position). Tesla's Supercharger network is a complement to Tesla ownership; it also reduces the substitute threat from other EVs by making Tesla ownership more valuable.

When evaluating partnerships or acquisitions, classify the relationship. Acquiring a complement integrates the value chain and can justify premium pricing for the bundle. Acquiring a substitute eliminates a competitor but may attract antitrust scrutiny. The regulatory test often hinges on whether the merged entity would have power over complements (potentially abusive) or over substitutes (reduced competition). Frame your strategy in the language regulators use — it will clarify your own thinking.

Bezos understood that Prime was not a standalone product — it was a complement to everything Amazon sold. Free two-day shipping made every purchase on Amazon more valuable. The more you bought, the more valuable Prime became. The more valuable Prime became, the more you bought. Bezos reportedly told his team that the goal was to make Prime so valuable that "it would be irresponsible not to be a member." He subsidised the complement aggressively: Prime Video, Prime Music, Prime Reading, and prescription discounts were all added at a loss to increase the value of the membership. The strategy was to own the complement relationship so completely that substitutes — other retailers, other streaming services — became irrelevant. By 2024, Prime had over 200 million members, and the complement logic had created a moat that no competitor could replicate.

Jobs treated the App Store as a complement to the iPhone, not a revenue centre. Apple took 30% of app sales, but the primary goal was to make the iPhone indispensable by ensuring it had the best complement ecosystem. When developers complained about the cut, Jobs held the line — but he also invested heavily in developer tools, documentation, and distribution. The insight: the iPhone's value was the sum of the device plus every app on it. Taxing complements too heavily would shrink the ecosystem; subsidising them would grow it. By 2011, the App Store had over 500,000 apps. The complement strategy had made the iPhone the most valuable product in consumer technology — not because of the hardware alone, but because of the ecosystem of complements that made switching to a substitute (Android) a downgrade for many users.