Cannibalization

What is Cannibalization?

In marketing strategy, cannibalization refers to a reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer.

Market cannibalization is a loss in sales caused by a company’s introduction of a new product that displaces one of its own older products. The cannibalization of existing products leads to no increase in the company’s market share despite sales growth for the new product.

Market cannibalization can occur when a new product is similar to an existing product, and both share the same customer base. Cannibalization can also occur when a chain store or fast food outlet loses customers due to another store of the same brand opening nearby.

What Does Cannibalization Mean?

Product cannibalization is a phenomenon that can affect any business or organization regardless of the product. Even with a detailed and specific marketing plan, cannibalization can still occur. It all depends on the reaction of the consumer base and the actual reception of the product. Usually this occurs when two products are created too similar to each other or placate the same consumers. This is common with large conglomerates, as their abundance of pre-existing products can easily be impacted in unforeseen ways by any new developments.

In e-commerce, some companies intentionally cannibalize their retail sales through lower prices on their online product offerings. More consumers than usual may buy the discounted products, especially if they’d previously been anchored to the retail prices. Even though their in-store sales might decline, the company may see overall gains.

Another example of cannibalization occurs when a retailer discounts a particular product. The tendency of consumers is to buy the discounted product rather than competing products with higher prices. When the promotion event is over and prices return to normal, however, the effect will tend to disappear. This temporary change in consumer behavior can be described as cannibalization, though scholars do not normally use the phrase “cannibalization” to denote such a phenomenon.

In project evaluation, the estimated profit generated from the new product must be reduced by the earnings on the lost sales.

Another common case of cannibalization is when companies, particularly retail companies, open sites too close to each other, in effect, competing for the same customers. The potential for cannibalization is often discussed when considering companies with many outlets in an area, such as Starbucks or McDonald’s.

Cannibalization is an important issue in marketing strategy when an organization aims to carry out brand extension. Normally, when a brand extension is carried out from one sub-category (e.g. Marlboro) to another sub-category (e.g. Marlboro Light), there is an eventuality of a part of the former’s sales being taken away by the latter. However, if the strategic intent of such an extension is to capture a larger market of a different market segment notwithstanding the potential loss of sales in an existing segment, the move to launch the new product can be termed as “cannibalization strategy”. In India, where the passenger-car segment is going up dramatically since the turn of this century, Maruti Suzuki’s launch of Suzuki Alto in the same sub-category as Maruti 800, which was the leader of the small-car segment to counter the competition from Hyundai is seen to be a classic case of cannibalization strategy.

A company engaging in corporate cannibalism is effectively competing against itself. There are two main reasons companies do this. Firstly, the company wants to increase its market share and is taking a gamble that introducing the new product will harm other competitors more than the company itself. Secondly, the company may believe that the new product will sell better than the first, or will sell to a different sort of buyer. For example, a company may manufacture cars, and later begin manufacturing trucks. While both products appeal to the same general market (drivers) one may fit an individual’s needs better than the other. However, corporate cannibalism often has negative effects: the car manufacturer’s customer base may begin buying trucks instead of cars, resulting in good truck sales, but not increasing the company’s market share. There may even be a decrease. This is also called market cannibalization.

Finally, cannibalization is also referenced in the search engine optimization (SEO) industry; it is known as keyword cannibalization. Keyword cannibalization happens when multiple pages on a website specifically target the same content, to the point where the search engine has a difficult time determining which page is most relevant for the search query, and thus might not necessarily promote the page one would want website visitors to see most.

While this may seem inherently negative, in the context of a carefully planned strategy, it can be effective, by ultimately growing the market, or better meeting consumer demands.

Cannibalization is a key consideration in product portfolio analysis. For example, when Apple introduced the iPad, it took sales away from the original Macintosh, but ultimately led to an expanded market for consumer computing hardware.

Examples of Market Cannibalization

Apple is an example of a company that has ignored the risk of market cannibalization in pursuit of larger objectives. When Apple announces a new iPhone, the sales of its older iPhone models immediately drop. However, Apple is counting on its new phone capturing competitors’ current customers, increasing its overall market share.

Companies often risk market cannibalization in hopes of gaining a bounce in overall market share. For example, a company that makes crackers may introduce a low-fat or lower-salt version of its brand. It knows some of its sales will be cannibalized from the original brand, but it hopes to expand its market share by appealing to health-conscious consumers who otherwise would buy a different brand or skip the crackers altogether.

Types of Market Cannibalization

Planned Cannibalism

One familiar type of cannibalism occurs every year when companies like Apple and Samsung release new versions at the expense of older models. Although these new releases cut into sales of the older models, which may still be popular, they also attract new buyers from other brands.

Cannibalization Through Discounts

Many retailers regularly put products on sale, either to increase cash flow or to make room for newer products. But regular discounts can have a cannibalizing effect, if buyers start to expect routine discounts. If customers refuse to buy items at full price, the retailer may be forced to offer increasingly steep discounts.

Cannibalization Through eCommerce

Many traditional retailers now offer online sales, which could come at the expense of their brick-and-mortar stores. However, these losses could be a net benefit, if online shopping attracts new customers from outside the retailers’ normal base.

Importance of Market Cannibalization

As seen in the example above, cannibalization can cost a company a significant amount of revenue. It often happens when a company fails to perform due diligence before launching its new product.

In some instances, the new product does not only hurt a company’s sales volume and revenue. The worst-case scenario is that the original product gets phased out of the market entirely.

However, sometimes a business intentionally cannibalizes its existing product with a new one. Why would a company introduce a new product line knowing very well that it’s going to jeopardize the existing one? – As a strategy for growing and expanding its operations.

Assume that ABC, the watch-making company, has been producing luxury watches for a while. However, for some reason, the watches don’t appeal to the intended target audience. Instead of producing a completely new product, the company decides to tweak its existing lux watch. The improvements are meant to attract the same consumers in the market.

In this case, ABC deliberately launches a new line of watches because it aims to retain its current customers, as well as attract new ones.

Cost Assessment

To accurately determine the success of a new product it is important to understand the detriment its sales are having to older products in a company’s line up. The danger is the new products are taking from old products made by the business instead of increasing market share by taking consumers from competing products made by different businesses. A model was created in 2012 to gauge the change in sales. It is Sales change for focal new model (at time t) = + change in demand for other models within same brand and category + change in demand for other brands within category + change in demand for other models within same brand in other categories + change in demand for other brands in other categories + primary demand (time is in weeks). This model needs to try and deal with three problems with accurately estimating the success of a new product. Market volatility means many new products enter and leave the market making it harder to understand what specific product is affecting the market share. Slowness of the market to react to new products that have been introduced, meaning that there has to be time scope allowing for seasonal changes and the consumers to act accordingly. Correlated error structures may permeate the brand as not just one product will be effected so it is important to understand the scope of the commodity and see total impact. The model tries to mitigate these areas of error that make older models less reliable.

There is also the danger of multiple distribution channel cannibalization which can lead to job insecurity and risk for the old channels as the new channels open. In the case of travel agencies; in the past nearly all travel groups relied on them as an intermediary for tourism, this meant face to face meetings to introduce the products or services that one group wishes to sell to the travelers. In recent years with new technology the necessity of travel agencies has been declining, with people being able to connect to the businesses they need to travel directly and cheaper than going through the more conventional means. Airlines and similar tourism focused companies instead push through marketing the populace towards using their website instead of booking with a tourism agency, this is because it’s cheaper to run and can be more convenient for the consumer. So the update in technology has forced market cannibalization to cut the spending in certain business groups leading to job insecurity, decreased job satisfaction, job alienation and risk aversion.

Cannibalization is a necessary evil in lot of cases. As sales plateau and decline only to stabilize at a lower amount, it is important for business to innovate and experiment in order to create something new and cutting edge to maintain market share. Strategic development is important for business and integral for moving forward. Nitin Pangarkar said it is very important for businesses to maximize competitiveness with business strategy and cannibalization is part of this. Cannibalization of markets is competing with others success and self-cannibalization is competing with yourself. As Steve Jobs said when he released the iPhone “If you don’t cannibalize yourself, someone else will”. Even though there are dangers with cannibalization it has been very successful at pushing business innovation forward and identifying stagnant areas of a business.

Risks

The diversion of sales from one product to another or from the same product to a different product can adversely effect the overall sales of a business. Wendy Lomax theorized that using a brand name and leverage of current users of a brand to push them into using a new product can be a large risk. This is due to the damaging nature which a failed product would have on the preexisting parent product. As sales dropped from the new product after it is no longer pushed there is no guarantee that sales will stabilize to the old product that was sacrificed for the current item. One of the unavoidable risks is to the established product but for self-cannibalization and growth this is essential.

Apple cannibalized their own sales of the iPad when the iPhone 6 was released in September 2014. According to a Forbes article, shipment of iPads was down 23% since the announcement of the iPhone 6. This is due to the new product (the iPhone) being large enough to have a lot of the features of the iPad without being as large making the iPad outdated and irrelevant. While the iPhone shipped massive amounts of product, the iPad never recovered to its previous sales plateau. Overall, this is a positive effect as turnover of new products allows company to get old users to spend money and keeps their products current which is very important in technology related fields. This is still an example of Apple betting sales of the old product to get higher sales on a new product in this case it was a success.

How to Prevent Market Cannibalization?

Company owners don’t need to stop making their existing products entirely. There are other strategies they can use to prevent cannibalization:

  1. Identify the specific markets for each of the products. In such a way, it’s easy to determine what gap the existing product fills and the specific consumers that the item serves. All of this is information that company owners need to have before deciding to launch a similar or new product.
  2. Assess the possible market demand for the proposed new product. In particular, determine how much net income the new product is likely to bring in. This means that one will need to evaluate the production costs incurred versus the benefits, which are in the form of new revenue.

It’s important to note that new products don’t always lead to higher revenue. They may increase sales volume in the short term but cause revenue to fall in the long term. In such a case, then a company is better off sticking with their original product.

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