Cannibalization

Cannibalization in business refers to the negative impact of a new product or service on the sales or market share of an existing product or service offered by the same company. I
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Updated on Jun 3, 2024
Reading time 4 minutes

3 key takeaways

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  • Cannibalization occurs when the launch of a new product or service diminishes the sales or market share of an existing product or service within the same company’s portfolio.
  • Companies must carefully assess the potential for cannibalization when introducing new offerings to ensure that the benefits outweigh the negative impacts on existing products.
  • Effective strategies to mitigate cannibalization include pricing adjustments, product differentiation, target market segmentation, and marketing campaigns highlighting the unique value propositions of each offering.

What is Cannibalization

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Cannibalization refers to the phenomenon where the introduction of a new product or service by a company adversely affects the sales or market share of its existing products or services. It often occurs when the new offering competes directly with the company’s established offerings, leading consumers to switch their purchases from the existing products to the new one. Cannibalization can occur in various industries, including consumer goods, technology, retail, and hospitality.

Importance of Cannibalization

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  • Strategic Decision Making: Understanding and managing cannibalization is crucial for companies making strategic decisions about product development, pricing, and market positioning. Failure to anticipate and address cannibalization risks can result in revenue loss and erosion of market share.
  • Resource Allocation: Companies must allocate resources effectively to maximize the overall profitability of their product portfolio. Assessing the potential for cannibalization helps companies prioritize investments and allocate resources to initiatives with the highest growth and profit potential.
  • Competitive Advantage: Managing cannibalization effectively can help companies maintain their competitive advantage and sustain long-term profitability. By optimizing their product mix and minimizing internal competition, companies can strengthen their market position and enhance customer loyalty.

How Cannibalization Works

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Product Overlap

Cannibalization typically occurs when a new product or service overlaps with the features, functionalities, or target market of existing offerings within the same company. Customers may perceive the new offering as a substitute for the company’s existing products, leading to a cannibalization effect.

Pricing Dynamics

Price plays a crucial role in cannibalization dynamics. If the new offering is priced lower than the existing products, customers may opt for the cheaper alternative, leading to cannibalization. Conversely, if the new offering is priced higher, it may attract a different segment of customers without cannibalizing sales of existing products.

Marketing Strategies

Effective marketing strategies can help mitigate cannibalization by emphasizing the unique value propositions of each product or service and targeting different customer segments. Companies may employ segmentation, targeting, and positioning strategies to differentiate their offerings and minimize overlap.

Examples of Cannibalization

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  • Technology Industry: A technology company launches a new smartphone model with advanced features and functionality. As a result, sales of its older smartphone models decline as customers upgrade to the new model, leading to cannibalization.
  • Retail Sector: A retail chain introduces a private-label brand that competes directly with its existing national brand products. The lower-priced private-label products attract price-sensitive customers, resulting in cannibalization of sales from the national brand products.
  • Fast Food Industry: A fast-food restaurant chain introduces a new menu item that competes with one of its existing bestselling products. Customers who previously purchased the original product may switch to the new offering, reducing sales of the original product and causing cannibalization.

Real world application

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Cannibalization is a common challenge faced by companies across industries when introducing new products or services. By carefully assessing the potential for cannibalization and implementing appropriate strategies to mitigate its impact, companies can optimize their product portfolio, maintain competitiveness, and drive sustainable growth in dynamic market environments.


Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...