Cannibalization refers to the reduction in sales volume, revenue, or market share of an existing product when a new product introduced by the same company decreases its demand. This phenomenon often occurs when new products are similar to existing ones, drawing customers away from what the company already offers.
Key Aspects of Cannibalization
Sales Volume and Market Share
Cannibalization primarily affects:
- Sales Volume: The number of units sold decreases for the existing product.
- Market Share: The percentage of the market that the existing product holds can diminish as customers shift to the new product.
Revenue Impact
Even though the sales volume might decrease, the overall revenue might increase if the new product has a higher profit margin or expands the customer base. However, if the new product merely displaces the old one without significant market growth, the company could lose revenue overall.
Types of Cannibalization
Product Line Extension
This occurs when a company introduces a new product that is a variation of an existing product. For example, a beverage company introducing a new flavor of a popular drink could cause some customers to switch from the original flavor to the new one.
New Market Entries
When a company enters a new market with a product similar to one it already offers, it may attract existing customers from current markets, thereby cannibalizing its own sales.
Historical Context
The concept of cannibalization has been integral to understanding market dynamics and product strategy since companies began diversifying their offerings. Historical examples include:
- Apple Inc.: The introduction of the iPhone led to a decline in iPod sales.
- Coca-Cola: Introduction of new beverages often affects the sales of their existing products.
Applicability in Business Strategy
Strategic Decision-Making
Understanding cannibalization is crucial for:
- Product Launch Decisions: Firms need to assess the potential negative impact on existing products.
- Pricing Strategies: Setting the right price points to balance the sales between new and existing products.
- Marketing Campaigns: Ensuring that promotional efforts do not inadvertently favor one product at the expense of another.
Comparisons with Related Terms
Brand Dilution
While cannibalization refers to the impact on sales and market share due to internal competition, brand dilution involves weakening of a brand’s value due to overextension, often into unrelated markets.
Market Saturation
Market saturation implies that a particular market is no longer creating new demand for a company’s product. Cannibalization, however, involves shifting existing demand from one product to another.
FAQs
How can companies prevent cannibalization?
Companies can mitigate cannibalization by:
- Differentiating new products from existing ones.
- Targeting new customer segments with new products.
- Implementing strategic pricing and marketing tactics.
Is cannibalization always negative?
Not necessarily. Cannibalization can be part of a deliberate strategy to enhance overall market share or to innovate and stay ahead of competitors. The key is to manage it effectively to ensure overall business growth.
What are some real-life examples of cannibalization?
Famous examples include:
- PepsiCo: Introduction of new snack flavors affecting sales of existing ones.
- Toyota: Launching Lexus affecting sales of high-end Toyota models.
References
- Christensen, Clayton M. “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.” Harvard Business Review Press, 1997.
- Levitt, Theodore. “Marketing Myopia.” Harvard Business Review, 1960.
- Foster, Richard N., and Kaplan, Sarah. “Creative Destruction: Why Companies That Are Built to Last Underperform the Market—And How to Successfully Transform Them.” Currency, 2001.
Summary
Cannibalization is a significant factor in product and market strategy, representing the competitive impact within a company’s product lines. Understanding and managing it can drive successful innovation and market dominance while ensuring long-term profitability. By carefully analyzing new product introductions and their potential effects, businesses can navigate the challenges of cannibalization to foster growth and maintain market share.
