What is Product Cannibalization and How Do You Avoid it?
All companies want to launch new products that steal customers away from competitors. But sometimes you just end up stealing sales away from yourself.
Product cannibalization can affect companies of all shapes and sizes. It’s happened to Kodak and Coca-Cola, while the likes of Apple and P&G have done it intentionally. Read on to find out everything you need to know about product cannibalization.
What Is Product Cannibalization?
Product cannibalization – also known as corporate cannibalism or market cannibalization – happens when a company’s new product displaces an existing one.
In other words, it reduces purchases of an older product and eats away at your own sales.
Total product cannibalization results in sales growth for a new product, but the company’s overall market share doesn’t increase. This can happen when a company launches a completely new product or a variation of an older product.
Depending on production costs, product cannibalization can really hurt a company’s bottom line. But sometimes companies deliberately do it to stay competitive and provide their customers with more choices.
What Causes Product Cannibalization?
Prior to launching, it’s important to make sure new products are significantly different from older models in terms of design, features, audience or pricing.
Let’s take a closer look at some of the causes of product cannibalization:
1. Failing to Reach New Audiences
If a new item shares the same customer base as an already existing product, it’s bound to attract the same audience and split sales.
2. Creating Comparable Products
If a new product doesn’t offer something different, like a quirky feature, a unique aesthetic or a new use case, you’ll attract the same customers and product cannibalization could become a problem.
3. Miscalculated Pricing
If not carefully implemented, low-priced products can steal significant sales away from more expensive products – particularly if there is little to differentiate them in terms of features or design. This can devastate profits.
Deliberate Product Cannibalization
Market cannibalization isn’t always a bad thing. Many companies do it deliberately to stay competitive, put customers first or expand their market share just a little.
For example, back in 2006, when Coca-Cola launched Coke Zero in the UK, it aimed to attract male consumers who were concerned about their sugar intake. While this took away sales from its original drink, as well as its female-focused Diet Coke brand, it attracted lots of 18-25 year old males back to the cola market. So its sales increased overall.
Other leading companies, such as Apple, Google and Facebook, proactively self-cannibalize so that they can improve their products and prevent new startups from taking their place.
In his biography, Steve Jobs is quoted as saying: “If you don’t cannibalize yourself, someone else will”. So when the iPod’s popularity was still through the roof, he launched the iPhone. While this hurt iPod sales, it attracted new customers and helped Apple stay ahead of competitors. Similarly, newly released iPhones make older models obsolete but the company remains a market leader.
Apple overlooked fears of product cannibalization to pursue larger objectives. While this could impact short-term profits, it can benefit a company in the long-term.
If your brand is looking to launch a new product and you want to offload old stock, try using a Where to Buy solution to send consumers to retailer sites. This means you’ll avoid having to incur direct to consumer costs for old products.
How is Cannibalization Calculated?
Whether you intend to undertake corporate cannibalism or not, it’s important to keep track of sales growth across all product lines to understand how new releases impact upon existing product sales.
Here’s how you can calculate product cannibalization and monitor the risks posed by new products.
Cannibalism Rate = No. of sales lost on existing product ÷ Sales of new product x 100
To get the number of sales lost, you can subtract this year’s sales from last year’s. So, for example, if an existing product sold 5,000 units last year but just 4,000 this year, the number of lost sales would stand at 1,000.
No. of sales lost on existing product = Last year’s sales – This year’s sales
Let’s say 3,000 units of your new product were sold this year.
Cannibalization Rate = 1,000 ÷ 3,000 x 100 = 33.3%
This means one-third of new product sales may have been taken from an existing product. However, this is just an estimate. Sales of an older product may have fallen for other reasons, such as reduced marketing activities or consumer trends.
Monitoring your cannibalization rate will let you see how new products are affecting overall sales and profits. It will also alert you if sales are just shifting from one product to another.
You can calculate the cannibalization rate for every existing product that may be impacted by a new release.
How to Avoid Product Cannibalization
If you want the launch of your new products to impact competitors, rather than the performance of your other products, here is what you need to do before launching.
Step 1: Conduct Thorough Research
To find new audiences for your product, you need to analyse and research the market for demand. It’s also a good idea to assess the competition, so you can find gaps in the market and learn from the past mistakes of other companies.
Next, you should outline who buys your current products. Set out their demographics, values, problems and goals based on the data you have. Try creating personas to bring your targeting to life.
Then, do the same for the target audience of your new product and compare the details. Some overlap is fine but, if the two groups are indistinguishable, it will probably result in significant product cannibalization.
ChannelSight can uncover deep insights into your customer base and will help you to understand their buying behaviour to a level of detail you never thought possible. Reach out to us to find out more.
Step 2: Ensure Your Products Are Distinctive
If there’s nothing to differentiate a new product from an existing one, you may end up shifting sales from one to the other and leave competitors completely unaffected.
Here are some ways to innovate without causing product cannibalization:
- Think outside the box: Create something totally unique that will appeal to a completely new demographic. This could mean transforming a smartphone into a wearable smartwatch or adding coffee to Coke to attract caffeine-craving adults, rather than sugar-starved kids.
- Include upgrades: Add new features that will appeal to a specific target audience. For example, back in 2013, Amazon launched its Kindle Fire HDX Tablet . To appeal to older people who hadn’t owned tablets before, it came with free, on-screen 24/7 tech support.
- Offer a premium option: Introducing an expensive product line will appeal to an upmarket audience that isn’t budget-conscious. This group may pay more for improved service, quality, convenience, design or limited edition releases. Launching a cheaper product may work too, but you need to ensure you don’t cannibalize more profitable products.
- Create complementary products: Launching something that works alongside an existing product will enhance your offering and attract both new and returning customers. Plus, it can’t lead to product cannibalization.
Whether you take a new approach to quality or pricing, distinctly different products should appeal to new audiences and significantly reduce your cannibalization rate.
Step 3: Carefully Position Your Product
Your product may address the pain points of a new group, but your work isn’t done yet. You need to make sure your marketing appeals to this target audience too.
Create content that’s on-brand, but be unique and diverge from past campaigns. Google and Facebook Ads make it easy to target new demographics, but you should seek out new publications for offline promotions.
A content compliance service is a great way to ensure that your carefully crafted brand collateral is being used correctly by retailers selling your products.
Step 4: Test Before Launching
No matter how much research you do, it’s impossible to know exactly how your target audience will react to a new release. So make sure you get feedback on your product, packaging and marketing through interviews, surveys, and focus groups before the launch day arrives.
If the wrong audience segments are attracted to your product, you’ll be able to identify the reason and address any market cannibalization risks early on.
Step 5: Measure Everything
Once launched, you should monitor individual product sales closely. This way, if there’s an unintended effect on existing product sales, you can take action fast.
Calculating the cannibalization rate on a monthly or quarterly basis will help with this. It’s also a good idea to observe the impact that discounts and promotions are having across your portfolio, as this can lead to market cannibalization as well. Setting a minimum advertised price for each product will help if you’re selling in the United States.
For European brands, a price monitoring service will help you to keep on top of your retailer network’s prices, while staying on the right side of EU regulations.