Also called: Crosspollination, Internal competition, Self-competition, Eroding demand, and Substitution effect
See also: Add-on, Cross Selling, Shop in Shop, White Label
Relevant metrics: Conversion rate, Average order value, Revenue, Customer lifetime value, and Cost per acquisition
How to calculate Cannibalization:
Cannibalization = (Sales of Product A - Sales of Product B) / Sales of Product A
What is Market Cannibalization?
Cannibalization is a term used to describe the process of a company’s new product or service replacing an existing product or service. It occurs when a company introduces a new product or service that is so successful that it takes away customers from an existing product or service.
This can be intentional or unintentional, and it can have both positive and negative effects on a company’s bottom line. Cannibalization can also refer to the process of a company’s new product or service taking away customers from a competitor’s product or service. In this case, it can be a positive effect for the company, as it can increase their market share.
Cannibalization is the process of a company’s products or services competing with each other, resulting in a decrease in sales or market share for one of the products or services. It is a common occurrence in the business world, especially in industries with a large number of competitors.
Where did the term Cannibalization come from?
Cannibalization is a term that originated in the business world. It is used to describe a situation in which a company’s own products or services compete with each other, resulting in a decrease in sales and profits. The term was first used in the 1950s by marketing experts to describe the situation when a company’s new product or service takes away sales from an existing product or service. The term is derived from the idea that one product or service is “eating away” at the sales of another.
Understanding Market Cannibalization
Cannibalization can be a problem for companies because it can lead to decreased profits and decreased market share. It can also lead to customer confusion, as customers may not understand why the company is offering two similar products. Additionally, cannibalization can lead to increased costs, as the company may need to invest in marketing and advertising to differentiate the two products.
Cannibalization can also be beneficial for companies. For example, if a company introduces a new product that is similar to an existing product, but is of higher quality or has more features, it can lead to increased sales and profits. Additionally, cannibalization can help a company to increase its market share, as customers may switch from the existing product to the new product.
When considering whether to introduce a new product or service, companies should carefully consider the potential for cannibalization. Companies should consider the potential benefits and costs of introducing the new product, and should also consider the potential impact on existing products and services. Companies should also consider the potential impact on customer loyalty, as customers may become confused or frustrated if the company introduces too many similar products. By carefully considering the potential for cannibalization, companies can ensure that their new products and services are successful and profitable.
By understanding the concept of cannibalization, companies can make informed decisions about introducing new products or services and can avoid unintentional cannibalization. This can help companies maximize their profits and ensure that their products or services remain competitive in the market.
Is product cannibalization good or bad?
Cannibalization is seen as a double-edged sword, as it can both help and hurt a company depending on how it is managed and the specific circumstances surrounding the new product launch. Companies need to weigh the potential benefits and risks carefully when considering product cannibalization, and implement strategies to minimize the potential downsides and maximize the potential benefits.
On one hand, product cannibalization can be seen as a positive development if it leads to increased overall revenue and market share for the company. For example, if a company introduces a new product that successfully captures market share from competitors, it can result in increased profits and a stronger position in the market.
On the other hand, product cannibalization can be seen as a negative development if it results in declining sales and revenue for existing products, or if it creates conflict with existing customers or channel partners. In these situations, product cannibalization can lead to a loss of market share, decreased brand value, and decreased customer loyalty.
The role of cannibalization in innovation?
By introducing new products that capture market share from existing ones, companies can encourage innovation and drive growth.
At the same time, market cannibalization can also discourage innovation if it leads to a decline in sales and revenue for existing products. In this case, the company may be less likely to invest in research and development and may instead focus on maintaining the status quo.
Should potential cannibalization be disregarded?
While it’s important for companies to pursue innovation and new opportunities, they also need to be mindful of the potential impact of their actions on their existing products and markets.
Cannibalization can lead to declining sales and revenue for existing products, which can negatively impact the company’s overall financial performance. It can also create conflicts with existing customers or channel partners, or negatively impact the company’s brand value and customer loyalty.
Therefore, companies need to carefully consider the potential impact of new products and innovations on their existing markets, and develop strategies to manage the potential risks of cannibalization. This may involve balancing the need for innovation with the need to protect existing products and markets, or developing new products and markets in a way that minimizes the potential downsides of cannibalization.
While it is important for innovative companies to pursue new opportunities and drive growth, they should not completely disregard potential cannibalization and must be mindful of its potential impact on their existing products and markets.
How can market cannibalization be avoided?
Market cannibalization can be a challenging problem for companies, but there are several strategies that can be employed to avoid it or minimize its impact:
- Segmentation. By segmenting the market, companies can create distinct product lines that cater to different customer needs and avoid direct competition with each other.
- Timing. Launching new products at different times can prevent them from directly competing with each other and minimize the risk of cannibalization.
- Pricing. Companies can use different pricing strategies to ensure that new products do not directly compete with existing ones. For example, they can price the new product higher to attract a different customer segment or offer the old product at a lower price to maintain its market share.
- Marketing. Companies can use targeted marketing strategies to differentiate the new product from existing ones and position it in a way that does not compete directly.
- Innovation. By continuously innovating and improving existing products, companies can keep them competitive and relevant in the market, reducing the risk of cannibalization by new products.
- Customer feedback. Companies can gather customer feedback to understand their needs and preferences, and use this information to guide product development and minimize the risk of cannibalization.
- Product positioning. Companies can position new products in a way that does not compete directly with existing ones by targeting different customer segments, geographic regions, or use cases.
The right strategy will depend on the company’s specific situation and goals, and will likely involve a combination of these and other approaches.
Other challenges of cannibilizing your own market include:
- Managing the Risk of Over-Cannibalization. Cannibalization can be a great way to drive sales, but it can also lead to over-saturation of the market and a decrease in overall sales.
- Balancing Cannibalization with Innovation. Cannibalization can be a great way to drive sales, but it can also lead to a lack of innovation.
- Managing Customer Expectations. Cannibalization can lead to customer confusion and frustration if it is not managed properly. It is important to ensure that customers understand the differences between the products and services that are being cannibalized and that they are aware of any changes that may be taking place.
- Ensuring Compliance with Regulations. Cannibalization can lead to legal and regulatory issues if it is not managed properly.
What is risk of cannibalization?
Cannibalization is a risk for companies because it can result in the decline of existing product sales and revenue, as well as damage to the company’s brand and reputation. When a new product takes market share from an existing one, it can lead to the following consequences:
- Reduced revenue. As customers shift from the existing product to the new one, the company’s overall revenue may decrease.
- Decreased market share. If the new product takes market share from the existing product, the company’s overall market share may decline.
- Lost customer loyalty. Existing customers may become frustrated with the company if they feel their needs are not being met, leading to a loss of customer loyalty.
- Increased competition. By introducing a new product, companies may attract new competitors to the market, increasing the level of competition.
- Brand damage. If the new product is perceived as a downgrade or less desirable compared to the existing one, the company’s brand may be damaged.
- Channel conflicts. If the new product is sold through different distribution channels than the existing one, conflicts may arise with existing channel partners.
Examples
Apple Inc.
In the early 2000s, Apple released the iPod, which was a revolutionary product that allowed users to store and play music on the go. However, the iPod was so successful that it began to cannibalize sales of Apple’s other products, such as the Mac and the iMac. As a result, Apple had to shift its focus away from its other products and focus more on the iPod.
McDonald's
The fastfood giant has been known to introduce new menu items that are similar to existing ones, such as the McRib sandwich. This new item was so popular that it began to cannibalize sales of other menu items, such as the Big Mac. As a result, McDonald’s had to adjust its marketing strategy to focus more on the McRib.
Amazon
The online retail giant has been known to introduce new products that are similar to existing ones, such as the Kindle Fire tablet. This new product was so successful that it began to cannibalize sales of other products, such as the Kindle ereader. As a result, Amazon had to adjust its strategy to focus more on the Kindle Fire.
Kodak
Kodak’s shift from traditional film cameras to digital cameras resulted in the cannibalization of its film camera business.
Netflix
The company’s shift from a DVD rental service to a streaming service led to the decline of its DVD rental business.
Adobe
Adobe’s shift from a perpetual license business model to a subscription-based business model for its Creative Cloud suite of products cannibalized its traditional software sales.
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What is the purpose of cannibalizing this product or service?
Hint The purpose of cannibalizing a product or service is to use the existing resources of the company to create a new product or service that will compete with the existing one. This can help the company to increase its market share and profitability. -
What are the potential risks associated with cannibalizing this product or service?
Hint The potential risks associated with cannibalizing a product or service include decreased customer loyalty, decreased customer satisfaction, decreased market share, and decreased profitability. -
What are the potential benefits of cannibalizing this product or service?
Hint The potential benefits of cannibalizing a product or service include increased market share, increased profitability, increased customer loyalty, and increased customer satisfaction. -
How will cannibalizing this product or service affect the overall business strategy?
Hint Cannibalizing a product or service can affect the overall business strategy by allowing the company to focus on a new product or service that can potentially increase its market share and profitability. -
What are the potential impacts on customer loyalty and satisfaction?
Hint Cannibalizing a product or service can have a negative impact on customer loyalty and satisfaction if the new product or service does not meet customer expectations. -
What are the potential impacts on other products or services in the same market?
Hint Cannibalizing a product or service can have a negative impact on other products or services in the same market if the new product or service is seen as a direct competitor. -
What are the potential impacts on the competitive landscape?
Hint Cannibalizing a product or service can have a negative impact on the competitive landscape if the new product or service is seen as a direct competitor. -
What are the potential impacts on the company's financial performance?
Hint Cannibalizing a product or service can have a positive or negative impact on the company's financial performance depending on the success of the new product or service. -
What are the potential impacts on the company's brand reputation?
Hint Cannibalizing a product or service can have a positive or negative impact on the company's brand reputation depending on the success of the new product or service. -
What are the potential impacts on the company's longterm growth prospects?
Hint Cannibalizing a product or service can have a positive or negative impact on the company's long-term growth prospects depending on the success of the new product or service.
You might also be interested in reading up on:
- The Innovator's Dilemma by Clayton Christensen (1997)
- Competing Against Luck by Clayton Christensen (2016)
- Shoe Dog by Phil Knight (2016)
- Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael Porter (1980)
- The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell (2000)
- Outliers: The Story of Success by Malcolm Gladwell (2008)
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