Why substitute matters to a first-time founder
Most early customers are not choosing between you and a look-alike startup; they are choosing between you and the spreadsheet, the intern or the habit they already rely on. If you only study direct rivals, you misjudge your real competition, price against the wrong benchmark and write messaging that ignores why people stay put. Substitutes also cap what you can charge, because buyers rarely pay much more than their workaround costs.
Examples of substitute
A spreadsheet and a nagging email are substitutes for an invoice-chasing app. So is doing nothing and hoping. The rival who built a similar app is a competitor. The spreadsheet is a substitute. You have to be more attractive than both.
Common misunderstanding
People only compare themselves with companies that look like them. The customer does not shop that way. They compare you with whatever they already do. A competitive advantage that beats a similar app, and loses to a spreadsheet, has not won the real comparison.
When to use it
Before you write your value proposition or set a price, list every way your target customer handles the problem today, including manual workarounds and doing nothing at all. For each, note what it costs them in time and money and what would make them stop. If you cannot explain why a customer would abandon their current substitute, sharpen the offer before spending on marketing.