Market Cannibalization
When the release of a new product by a company reduces the sales and market share
What Is Market Cannibalization?
Market cannibalization is when the release of a new product by a company reduces the sales and market share of an existing product by that company. It is also referred to as corporate cannibalization or market cannibalism.
Cannibalization usually occurs when the products are similar or attract the same target demographic, thus not reaching a new customer base.
The new product decreases the demand for the older product, and, as per its name, it eats up the sales, revenue, and market share of that older product. It has the effect of reducing overall sales and stunting sales growth.
Like the image above, new products act as bigger fish in the sea, aka the consumer market, and eat the sales of smaller fish.
However, market cannibalization can be used as a deliberate strategy. Companies may release products knowing it will cut into existing sales.
It can positively or negatively impact the company's bottom line depending on if it was planned, how it is executed, and how the cannibalization is handled. It is essential to conduct thorough market research to avoid corporate cannibalization.
Key Takeaways
- Market cannibalization is when the release of a new product by a company reduces the sales and market share of an existing product by that company.
- Market cannibalization can be a deliberate strategy to increase market share, customer loyalty, profit margins, or stay competitive.
- Companies can prevent market cannibalization by carefully differentiating their new products from existing products, timing their product launches strategically, and marketing their new products effectively.
- The cannibalization rate is a percentage value that indicates the sales loss of the existing product when a new product is introduced.
- Market cannibalization is a common occurrence in many industries, and it can be a positive or negative force for companies, depending on how it is managed.
Cannibalization Strategies
If done right, market cannibalization can provide many benefits. Some of the benefits include:
1. Increased market share
While cannibalization usually decreases the market share of existing products, if employed successfully, it can help increase the company's overall market share.
This strategy works by harming their competitors and stealing some of their market shares at the expense of the company's products.
Take Coca-cola as an example. The company introduced a variety of coke flavors (e.g., coke cherry, coke zero, etc.), which decreased the market share of the original flavors. However, it also had the effect of increasing global market share.
Thus, Coca-cola was able to introduce new products and increase its market share successfully.
2. Increased customer loyalty
While consumers are opting to buy the new product instead of the existing products, they are still choosing to stick with the same company or brand.
This has the effect of increasing customer loyalty as consumers are more likely to buy products from a brand they already know.
3. Increased profit margins
Cannibalization can also work to increase profit margins. Say a company is looking to launch a new product, Product B, which is more economical to produce compared to their existing product, Product A because it's cheaper due to the materials used, technology, or the production process.
This company will try to cannibalize Product A by marketing Product B to increase the new product's market share and, in turn, profits.
This can be seen in the computer and phone market. Year over year, companies introduce new models that are cheaper to produce due to technological advances.
Although the product may be more expensive, consumers will still choose to buy the newer model, which cannibalizes the sales of older models. This is what the companies aim for as the new models provide a better profit margin.
4. Staying competitive
Market cannibalization is also used as a strategy to stay competitive. If companies do not diversify their product line or introduce new products to the market, one of their competitors will; thus, cannibalization can be a defense mechanism.
It is better to cannibalize yourself and retain your existing customer base than have a competitor steal them from you.
5. Not becoming obsolete
Companies might also encourage market cannibalization when older models and products are not selling well.
Launching a product with improvements from existing products can help keep consumers loyal, boost revenue, and ensure the company does not become obsolete.
Companies must constantly improve their products because there are dozens of competitors waiting to swoop in and steal consumers.
Types of Market Cannibalization
Market cannibalization can be deliberate, unplanned, and started through different means.
1. Planned Cannibalization
This cannibalization is deliberate and occurs every time a company introduces a new product. It is usually a strategy to stay competitive, increase profit margins, customer loyalty, or market share.
Planned cannibalization can be seen in tech companies like Apple and Microsoft, which release new models annually. Even if this eats some of their current product sales, it also attracts customers from competitors.
2. Discounts
Discounts, when not careful, can cannibalize sales as consumers refuse to buy an item at full price or reduce profits as the price has to be permanently decreased.
Thus, sellers should be careful when offering discounts to ensure that consumers do not start expecting them.
3. E-commerce
Online stores and shopping have become more prominent in the last decade, which has had the effect of decreasing in-person sales. Thus, e-commerce platforms can have a cannibalizing effect. However, it is not worrisome if online sales offset the losses from reduced store sales.
How to Prevent Market Cannibalization
Products that are similar to the existing products, targeted to the same market, and have similar pricing or placement are all prone to market cannibalization. Good examples of this would be products that are new flavors or only have some added features.
These products are similar to older products, thus vying for the same consumer dollars. Therefore, when creating or launching new products, it is vital to have product differentiation and ensure that new products are branded differently to attract new consumers and avoid market cannibalization.
While there is no surefire way to prevent market cannibalization, proper market research and branding can make a difference. For instance, providing a cheaper alternative to a premium product can be a way to avoid cannibalizing existing products.
However, companies should be careful that they do not deter from the value of the premium product.
Timing of product launches and marketing can also help minimize the effects of or reduce the risk of cannibalizing older products.
The right timing can ensure that the new product doesn’t cannibalize the potential success of the older product and that it’s not too late that interest has shifted or died out.
How to Calculate Cannibalization Rate
The cannibalization rate is a percentage value that indicates the sales loss of the existing product when a new product is introduced or how many consumers opt to buy the new product over the older one.
The cannibalization rate measures a new product's impact on existing products by measuring the impact through sales.
It is the percentage of sales that would have gone to the old product had the new product not been introduced.
There are two different formulas to calculate cannibalization depending on the information a company has on hand. Both will give the same answer.
In order to calculate the rate, a company will need:
-
Loss of sales on the old product
-
Sales of new product
OR
-
New product sales replacing existing product sales
-
Total sales of existing product
Cannibalization Rate = (Loss of sales on the old product / Sales of new product) = (New product sales replacing existing product sales / Total sales of existing product)
The cannibalization rate can be calculated before or after a new product launch to estimate the effect on older products. If this rate is being used to inform decisions, especially before a new product launch, companies must forecast sales accurately.
The answer resulting from the calculation will result in a number between 0-100%. A value of 0 would indicate that the introduction of a new product had no effect on existing products and that no market cannibalization occurred.
On the other hand, a value of 100% would indicate that the new product replaced the existing product and that all consumers of the existing product have opted to buy the new product. As the rate approaches 100%, that means that the new product has “eaten up” more sales of the existing products.
Imagine a company calculating the cannibalization rate for Product B (a new product) and Product A (the existing product). Say the company found a cannibalization rate of 25%.
This would indicate that Product B will take 25% of sales from Product A or that Product B will replace 25% of Product A sales.
Examples of market cannibalization
Here is a comprehensive example that will go through using the cannibalization rate formula and how it can be interpreted.
Imagine you run a sporting goods store and sell a football for $25. You, then, decide to introduce a new football that is lightweight for $20. A few months later, you would like to analyze the effect the new lightweight football has had on the sales of the original one.
You estimate that the football used to have 300 sales monthly, but after introducing the new lightweight football, sales have dropped to 235. The sales of the new football are 250.
Cannibalization Rate = (Loss of sales on old product / Sales of new product) = ((300 - 235) / 250) = (65/ 250) = 26%
Thus, the cannibalization rate of the new lightweight football is 26%. This means that the new football will take 26% of the sales from the older football or that consumers who form the 26% of sales will opt to buy the new football.
Real-life market cannibalization
Market cannibalization occurs everywhere. An example of a company that utilizes it as a strategy is Apple. Apple is a technology company headquartered in California, United States, mainly concentrating on consumer electronics, online services, and software.
Apple releases new iPhones almost annually with improvements and sometimes changes from the previous models. Although these newer models cut into the sales of older models, Apple still releases new models.
This is because Apple uses market cannibalization as a strategy to stay popular, steal customers from competitors to expand their consumer base, fend off competitors from stealing their consumers, increase profits, and increase consumer loyalty.
Despite the fact that none of these benefits are confirmed, Apple still risks losing sales on older models because it can lead to increased overall market share.
Furthermore, Apple is in a position where it can sell new products at a higher price. Thus, cannibalizing an older, cheaper product is beneficial if consumers opt to buy the more expensive one.
Other companies that use market cannibalization as a strategy include:
- Microsoft
- Nestlé
- Coca-cola
- and more...
Grocery chains can cannibalize more than just a product; they can cannibalize the sales of a specific store location.
For instance, if a new grocery store opens near an older one, they can cannibalize each other's sales because consumers now have the option to go to either. However, the intended purpose of opening a new store is to attract consumers from competitors.
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