Market cannibalization occurs when a company’s new product adversely affects the sales of its existing products, resulting in no net increase in overall market share. This happens when the new product primarily targets the same customer base as the existing product, leading to shifting rather than expanding the market. For instance, opening a new store location only to redirect customers from an existing store, rather than attracting new ones.
Key Insights into Market Cannibalization
- Sales Redirection: Introduction of new products can lead to repositioning rather than an expansion of the consumer base.
- Strategic Considerations: Sometimes used strategically to outperform the competition.
- Measurement: Cannibalization rate evaluates the loss in sales of old products as a percentage of new sales.
- Brand and Placement: High risk rests within similarly branded products aimed at overlapping markets.
How Market Cannibalization Develops in Companies
Market cannibalization, also termed corporate cannibalism, can happen both intentionally and accidentally. Companies inadvertently lead consumers away from existing products through certain marketing campaigns or advertisements, impacting overall profitability.
Planned Cannibalism
Industries often strategically introduce new versions of products, such as tech companies releasing newer models of devices, knowing this will decrease sales of older versions but with the goal of enhancing market penetration against rivals.
Cannibalization Through Discounts
Retailers might adopt product discounts expecting higher cash inflows or to clear inventory space, yet regular markdowns can habituate consumers to wait for deals, ultimately undercutting original margins.
Cannibalization via eCommerce
As traditional retailers expand into online platforms, in-store sales might drop, which, paradoxically, could be offset by acquiring a new online customer base previously out of reach.
Preventing Market Cannibalization
Strategically brand differentiation and careful product timing can offer resistance to market cannibalism. Incorporating distinctive brand spaces or leveraging lower-cost alternatives— like competitive ‘fighting brands’, can maintain the delineation between market segments while protecting premium products from erosion.
Inevitability of Market Cannibalism
Despite avoiding efforts, scenarios such as the rise of eCommerce dictate the inevitability of market cannibalization. For instance, department stores operate online presences despite potentially diminishing physical sales to counter external internet competition.
Evaluating Market Cannibalization: Pros and Cons
Advantages:
- Revitalizes interest in older product lines.
- Prevents competitors from capitalizing on low-cost alternatives.
Disadvantages:
- May degrade the value associated with premium brand segments.
- Could lead to undue saturation in concentrated markets.
Real-World Examples of Market Cannibalization
Apple Inc.
Apple continually launches new iPhones, which markedly cuts the sales of previous models. Yet, this model intensifies overall competitive positioning and market share retention.
Product Diversification in Food Companies
Brands aiming to diversify, e.g., launching healthier options alongside conventional items, might endure substitution but gain traction with niche consumer bases.
Cannibalization Rate Calculation.
The cannibalization rate can offer precise insight:
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Formula:
Cannibalization Rate = 100 x (Lost sales from old product) / (Total sales of the new product)
FAQs on Product Cannibalization
Is Product Cannibalization Positive or Negative?
It depends on strategic execution. Properly rolled-out entries can ultimately foster growth and increased market traction, while ineffective launches may deplete existing sales margins without generating sufficiently new business.
Measuring Product Cannibalization?
Use the cannibalization rate, representing proportionately lost sales relative to new product sales—a crucial data point in marketing strategy formulation.
Why Is Understanding Product Cannibalism Essential?
Because every new product governing similar territory to existing lines needs thorough analysis and planning. Thus, minimizing risks and ensuring sustainable growth are quintessential aspects of market intelligence.
Understanding market cannibalization equips businesses to forge ahead strategically—ensuring that new journeys foster broad market infiltration rather than merely cannibalizing existing capabilities.
Related Terms: corporate cannibalism, branding, market research, sales impact, cannibalization rate.
References
- Nuremberg Institute of Marketing.“Don’t Get Eaten! Understanding and Handling Cannibalization.”
- Wall Street Journal.“Marriott to Take on Airbnb in Booming Home-Rental Market.”Accessed June 13, 2021.
- ChannelSight.“What is Product Cannibalization and How Do You Avoid It?”
