What Is Market Cannibalization?

Market Cannibalization means decline in sales that a company faces due to the introduction of some new product that replaces their own old products. It’s like two lemonade stands taking away customers from each other.

Understanding Market Cannibalization

In business, when a new product becomes popular, it might “steal” sales from an existing product, even if both are from the same company.

 

Here’s why it matters:

 

• Less overall profit: While you still make sales, the total income might decrease because people choose the newer, often cheaper option.   
• Confused customers: Similar products can make choices tricky. People might pick the wrong one, missing out on what they truly wanted. It’s like accidentally grabbing an orange soda when you craved lemonade!

How Does Marketing Cannibalization Work?

Imagine two hungry wolves fighting for the same piece of meat; that’s how it works! 

Here’s the breakdown:

 

New Offering Emerges: A company launches a new product or service to attract new customers and increase overall revenue.

 

Internal Competition: The new offering competes with an existing product/service that targets the same customer base. This situation creates internal competition within the products or services.

 

Shifting Customer Preferences: Customers who have previously bought the existing product might be influenced by the features, pricing, or convenience offered by the new product, leading to a decline in sales for the original product.

 

Potential Outcomes: There are a few ways this can play out:

 

• Reduced Overall Sales: In the worst-case scenario, cannibalization can lead to a net decrease in total sales, even if sales of the new product are positive.
• Profit Margin Impact: If the new offering has a lower profit margin compared to the cannibalized product, overall profitability might decline.

Examples:

 

• A fast-food chain introduces a low-cost burger menu, diverting customers away from its premium options.
• A clothing store introduces a casual wear line to compete with its established formal wear line.

It’s worth noting:

 

• Cannibalization isn’t always bad. It can be a strategic move to enter new markets or disrupt competitors.
• Careful planning can help reduce cannibalization. This includes conducting extensive market research, creating clear product differentiation, and avoiding unnecessary feature overlap.
• Understanding how cannibalization works enables businesses to make informed decisions about new product launches while reducing the risk of harm to existing offerings.

Importance Of Market Cannibalization

The importance of cannibalization in business can be a double-edged sword. Here’s a breakdown of both the positive and negative aspects:

Positive Impacts:

 

• Market Expansion: Launching a new product or service that competes with an existing one can be a strategic move to reach new market segments. This enables you to grow your customer base and reach previously untapped demographics.

 

• Innovation and Disruption: Cannibalization can occasionally be a catalyst for innovation. Offering a new, potentially disruptive product forces your competitors to adapt and improve their offerings, benefitting the entire market.

 

• Phasing Out Outdated Products: Cannibalization is a natural way to phase out obsolete or less profitable products. As customers transition to the new offering, the older product can be gradually phased out, streamlining your product portfolio.

 

• Increased Efficiency: The consolidation of similar products or services can result in increased efficiency in areas such as manufacturing and marketing.

Negative Impacts:

 

• Reduced Sales and Profits: The most significant disadvantage is the possibility that cannibalization will eat into existing sales and profits, particularly if not managed carefully.

 

• Brand Dilution: A cluttered product portfolio with cannibalistic offerings can erode brand identity and mislead customers about your core message.

 

• Channel Conflict: When cannibalization occurs across multiple sales channels (for example, online vs. physical stores), it can cause friction and tension between them.

 

• Customer Confusion: Having too many similar products can confuse customers, making it difficult for them to choose and potentially resulting in lost sales.

 

The main takeaway is that cannibalization can be an effective tool for growth and innovation, but it must be approached with caution and a clear strategy. 

Common Types Of Market Cannibalization

Market cannibalization can occur in various ways within a business. Here are some of the most common types:

1. Product Cannibalization:

 

This is the most common type. It occurs when a new product competes with an existing product in your portfolio, resulting in “eating its own sales.”  Here are a few scenarios:

 

• Introducing a budget phone line that competes with your premium phone.
• Introducing a smaller beverage size, which reduces sales of your larger size.
• Introducing a new software version that shares features with an existing product.

2. Service Cannibalism:

 

This happens when you introduce a new service and it competes with an existing one.  For example:

 

• Provide a basic self-service car wash option to compete with your full-service car wash package.
• Introducing a low-cost subscription tier for your streaming service, which may reduce sales of your premium tier.

3. Channel Cannibalism:

 

This occurs when you launch a new sales channel that competes with an existing one. Here’s an example.

 

• Launching a strong online sales presence may reduce sales from your brick-and-mortar stores.
• Offering phone consultations in addition to traditional in-person consultations may reduce the number of in-person appointments available.

4. Geographical Cannibalism:

 

This occurs when you open a new store location too close to an existing one, resulting in competition for the same customer base. Here’s an example.

 

• Opening a second coffee shop across the street from your first may reduce sales at the existing store.

5. Customer Cannibalization:

 

This is a less common type, but it can occur when you upsell or cross-sell a product or service to a customer who was already planning to make a purchase. While it might increase revenue per customer, it doesn’t necessarily lead to new sales.  For example:

 

• Encouraging a customer buying a phone case to also purchase a screen protector they might not have originally intended to buy.

 

Side Effects Of Market Cannibalization

While occasionally a strategic move, it can also have negative consequences if you do not handle it properly. Here are some of the side effects and how to avoid them, with an illustrative example:

Side Effects:

 

• Reduced Overall Sales: New products may steal sales from existing ones, resulting in a net decrease in total sales, even if the new product performs well.

 

• Profit Margin Decline: The cannibalizing product may have a lower profit margin than the one being cannibalized, reducing overall profitability.

 

• Customer Confusion: Having too many similar products can confuse customers, making it difficult for them to choose and potentially resulting in lost sales.

 

• Brand Dilution: A cluttered product portfolio erodes brand identity and makes it difficult to communicate your brand message effectively.

 

• Inventory Management Challenges: Managing inventory for multiple similar products can be complicated, resulting in higher storage costs or stockouts.

 

• Channel Conflict: If cannibalization occurs across different sales channels (e.g., online vs. physical stores), it can create friction and tension between those channels.

Prevention Strategies:

 

• Market Research: Before launching a new product, conduct extensive market research to identify potential cannibalization risks. Analyze customer needs and make sure the new product targets a different market segment or provides unique value.

 

• Product Differentiation: Clearly distinguish your products or services. To avoid customer overlap, highlight each offering’s unique features, benefits, and target audience.

 

• Pricing Strategy: Use strategic pricing to avoid direct competition among your product offerings. A budget line may be less expensive, whereas a premium line may include additional features to justify its higher price.

 

• Phased Rollout: Consider a phased rollout for new products, particularly if cannibalization is a significant risk. This allows you to monitor the impact on existing products and make changes as needed.

 

• Communication Strategy: Proactive communication through marketing and sales can help to clear up customer confusion. Clearly communicate the value proposition of each product and who it is intended for.

 

• Channel Management: Create a clear strategy for managing multiple sales channels. Avoid direct competition by providing exclusive products or services via specific channels.

Example:

 

Consider a company that sells athletic shoes. They offer a popular line of high-performance running shoes at a premium price. They consider launching a new line of low-cost running shoes to broaden their market reach.

 

This new budget line has the potential to cannibalize sales of their existing premium shoes. Customers who might have purchased the premium shoes may choose the cheaper option instead.

Prevention Strategies:

 

• Market Research: Investigate the budget running shoe market. Is there a customer segment that would not buy the premium shoes but would prefer a more affordable option?

 

• Product differentiation: Ensure that the budget line targets a different audience, such as beginners or casual runners. It may have fewer features or use different materials to justify its lower price.

 

• Pricing strategy: Price the budget line significantly lower than the premium shoes, highlighting the value proposition for each.

 

• Communication Strategies: Market the budget line as a good choice for first-time runners or those on a tight budget. Highlight the premium line’s features that make it worth the extra cost for serious runners.

 

By following these strategies, the company can minimize the risk of cannibalization and potentially expand their market reach with the new budget line without harming sales of their existing premium shoes.

 

Kodak and the Digital Revolution: A Case of Market Cannibalization

Source: Kodak Market Cannibalization

Challenge:

 

For the majority of the twentieth century, Kodak dominated the photographic industry. Their film and camera products were synonymous with preserving memories. However, the emergence of digital photography in the late 1980s posed a significant challenge. Kodak was initially hesitant to embrace this new technology, seeing it as a potential cannibalizer of their traditional film business.

Solution (or lack thereof):

 

Kodak’s initial response was slow and cautious. They were concerned that promoting digital cameras would cut into their highly profitable film sales.  While they eventually developed their own digital cameras, their marketing efforts were still focused on film. This enabled competitors such as Sony and Canon to establish a presence in the burgeoning digital market.

 

Key Takeaways:

 

• Missed Opportunity: Kodak’s reluctance to embrace digital technology cost it the opportunity to lead the market transition. By sticking to their current business model, they allowed competitors to take market share.
• Fear of Cannibalization: Kodak’s fear of cannibalizing film sales resulted in a larger long-term loss. They underestimated digital photography’s disruptive potential while overestimating film’s longevity.
• Importance of Adaptability: The Kodak case emphasizes the significance of responding to changing market dynamics. Companies must be willing to cannibalize existing products or services in order to invest in new technologies and future-proof their operations.

 

This example demonstrates how market cannibalization, while a risk, can be mitigated through a proactive and strategic approach. Understanding customer needs and embracing innovation can help businesses navigate changing markets and avoid the fate of Kodak.

 

FAQs

What are the risks in Cannibalization?

 

These are the risks in cannibalisation:

 

• Less overall profit: You might sell more units, but cheaper ones, potentially lowering your total income.
• Confused customers: Similar products can leave people unsure, choosing the wrong one or leaving empty-handed.
• Wasted resources: Marketing efforts spread thin can dilute the impact of both campaigns.

 

Is market cannibalization always bad?

 

Not necessarily. In some cases, it can be a strategic move:

 

• Market Expansion: Reach new customer segments with a new product.
• Innovation and Disruption: Drive innovation and force competitors to adapt.
• Phasing Out Products: Phase out outdated products with a cannibalizing new product.
• Increased Efficiency: Consolidate similar products or services to streamline operations.