What it means
Printers and cartridges, coffee machines and pods, consoles and games, mortgages and home insurance are all complements. The practical consequence for a business is that the two revenue lines are linked, so a forecast that models each product in isolation will usually be wrong in both directions.
The clearest reason complements matter is pricing. If two products are genuine complements, a company can price one at or below cost to build an installed base and recover the margin on the repeat purchase, which is the logic behind the razor and blades model.
Economists measure the strength of the link using cross-price elasticity of demand: the percentage change in the quantity sold of one good divided by the percentage change in the price of the other. A negative figure means the goods are complements, a positive figure means they are substitutes, and a number close to zero means they are effectively unrelated.
Complements also carry risk. A business whose product is only useful alongside someone else's is exposed to that other company's pricing, redesigns and discontinuation decisions, which is why accessory makers watch their partner's product roadmap closely.
Two nuances catch people out. The relationship can be asymmetric, so cheaper machines lift consumable sales far more than cheaper consumables lift machine sales, and in staffing contexts "complement" simply means approved headcount, an unrelated meaning of the same word.
In practice
Real-world examples.
Example
A kitchen appliance brand drops the price of its coffee machine from $149 to $99 in the run-up to the holidays, accepting a thin margin on the machine itself. Pod sales in the following quarter rise sharply, because each machine sold adds a customer who buys pods roughly fortnightly. The finance team tracks the two lines as one contribution stream rather than judging the machine on its own margin.
Example
A retail bank offers a discounted mortgage rate to customers who also take its home insurance. The insurance is a complement to the mortgage in the customer's mind, since one purchase creates the need for the other. The bank models the combined lifetime value of the pair, which is what makes the discounted rate viable.
Example
A cinema chain holds ticket prices flat for two years while raising concession quality. Management understands that tickets and concessions are complements, and that a full auditorium at a modest ticket price generates more total contribution than a half-empty one at a premium price.
Formula
Calculation
Cross-price elasticity of demand = (% change in quantity sold of good A) / (% change in price of good B). A negative result confirms the goods are complements.
An office equipment maker cuts the list price of an entry-level printer from $200 to $160, a change of -$40, or -20%. Over the following year, sales of the matching ink cartridges rise from 50,000 units to 59,000 units, an increase of 9,000 units, or +18%.
Cross-price elasticity = 18% / -20% = -0.9
The negative sign confirms the two are complements, and the size, close to 1, says the link is strong: a 1% cut in printer price lifts cartridge volume by about 0.9%. At a cartridge price of $35, the extra 9,000 units add 9,000 x $35 = $315,000 of cartridge revenue, which the finance team can weigh against the margin given up on each printer sold.Case study
Seen in the real world.
Northgate Instruments is a fictional laboratory equipment company used here purely as an illustrative example. It sold benchtop analysers at $60,000 each, costing $45,000 to build, and it also sold the proprietary reagents those analysers consumed, worth about $22,000 a year per installed machine at a 70% gross margin.
Sales had stalled at 40 analysers a year, so the commercial director proposed cutting the machine price by 20%, to $48,000. Machine gross profit per unit fell from $15,000 to $3,000, and although volume rose to 55 units, total machine gross profit dropped from $600,000 to $165,000, a fall of $435,000 in that year. On the machine line alone, the decision looked like a mistake.
The reagent line told the other half of the story. Each analyser stayed in service for about five years, generating $22,000 x 70% = $15,400 of reagent gross profit annually, or $77,000 over its life. The 15 extra machines therefore carried $1,155,000 of reagent gross profit, comfortably ahead of the $435,000 sacrificed on hardware, and Northgate began reporting the two products as a single margin pool.
Watch out
Common mistakes.
- Judging a complementary product on its own margin. A machine sold at a small loss can be the most profitable line in the business once the consumable it drives is counted.
- Confusing complements with substitutes. Substitutes compete for the same purchase, so a price cut in one reduces sales of the other, which is the opposite relationship and calls for the opposite pricing response.
- Assuming the link is permanent. A rival launching a cheaper compatible consumable can break the connection overnight and leave a business selling hardware below cost with no annuity behind it.
Questions
People also ask.
How do I know whether two of my products are complements?
Compare the sales history of one against price changes in the other and calculate the cross-price elasticity; a consistently negative figure is good evidence.
Are complements always physical goods?
No, services complement each other too, as with tax filing software and paid support, or a gym membership and personal training sessions.
Does a complement have to be sold by the same company?
No, and that is precisely the risk, because when the complement belongs to someone else you depend on their pricing and product decisions.
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