Around 30,000 new consumer products are launched each year, according to Harvard Business School professor Clayton Christensen.
Brands are under constant pressure to demonstrate sales growth, increase profits, and acquire new customers. As a result, your innovation team likely has a lot of new product ideas percolating. But with so many products already on the shelf, there’s bound to be some overlap or cannibalization that takes away from existing products in your line.
Let’s cover precisely what product cannibalization is and how you can either use it to your advantage or cut it off at the pass.
What is Product Cannibalization?
Product cannibalization is exactly what it sounds like: A new product eating another by stealing sales volume and revenue from the existing offering.
Picture this: you work for a hard seltzer brand that already has a lemon flavor on the shelves, and it’s selling pretty well. You then develop an idea to expand your product line by releasing an option with reduced sugar that also happens to be lemon flavored. And you decide to offer it at a lower price point.
Because the two products are so similar, your consumers may choose to purchase the reduced sugar option because they essentially get nearly the same product for less money and an added benefit. This could mean less revenue for your brand. And you could end up having to phase out the original lemon offering altogether.
Scenarios like this typically occur when a company fails to perform its due diligence before launching a new product.
However, while accidental product cannibalization can be incredibly harmful to your brand, there are some occasions when companies purposefully employ cannibalization as a strategy to expand market reach or introduce new products.
Types of Product Cannibalization
Some common types of product cannibalization include:
- Offering discount prices on one product and not the other
- Releasing a cheaper product line that is too similar to a product line you already have
- Introducing a new variety that appeals to the same market as an existing variety
- Encouraging a "trade up": When you introduce a more premium product to the market - you want to encourage existing customers to trade up to the new model/variety
- Providing variety: For high volume, high frequency categories in which consumers crave variety (think food & beverage and entertainment), it's important for brands to have multiple products that appeal to the same core audience
How to measure Product Cannibalization
If you’re trying to avoid product cannibalization, carefully consider whether it could happen when you release a new product. Measure the impact your product will have before it launches to avoid shooting yourself in the foot.
Before launching a product
To measure potential product cannibalization before launching a product, it’s important to test new product concepts with existing customers and potential new customers to understand the new product's overall market potential as well as its potential to cannibalize your existing lineup.
There are several survey-based methodologies you can leverage to address these objectives, which we’ll explore in an upcoming blog post.
By continually testing and measuring your promotions, you can identify warning signs of cannibalization in future campaigns, assess the competition, and understand (through research & data) how new products and prices add to your portfolio.
After launching a product
If you’ve already launched a product and know that you’re experiencing product cannibalization, here’s one way to measure it.
Examine sales of each product, both absolutely and as a proportion of total sales. If the sales of the old product are dropping proportional to the rise in sales of the new product, that's pretty strong evidence of cannibalization.
It's important to consider trade-in to the brand + new category consumers in your calculus as well. Even if a new product is cannibalizing an old product, if it's also bringing a lot of new customers to the brand and category, then the cannibalization is likely worth it, and the old product would probably be delisted at some point.
But should you find that you’re experiencing product cannibalization unintentionally and wish to stop it, you’ll need to reevaluate your products and prices. You may be able to make some minor changes to one or both products to encourage customers to buy both.
Is Product Cannibalization a good thing?
Some instances of product cannibalization are purposeful, while others are accidental. Accidental cannibalization can result in an overall loss of sales, while purposeful cannibalization can expand a company’s reach and profits.
Accidental product cannibalization is almost always a negative thing. You don’t want to compete with yourself and lose to your own product.
Creating a cheaper product that’s nearly identical to an item you’ve already released means customers will choose the less expensive option. Not only will your first product lose sales, but your overall profits will decline.
However, intentional product cannibalization is often a strategic move by major companies to grow their overall sales.
Though they lose sales on one product, their new or repeat customers outweigh the loss. They have an overall profit increase with minor drawbacks.
Product Cannibalization examples
Coke is an excellent example of expanding your market through product cannibalization. They started with the original Coke, and they now have dozens of different flavors for consumers to choose from.
While new flavors and Coke products effectively cannibalized the original, the company’s overall sales significantly increased. They released dozens of nearly identical products that compete with each other and continue to earn billions of dollars each year.
An essential part of Coke’s strategy is the variety play outlined in the “types of cannibalization” section above. Coke prices all of its various flavors equally. Even if Coke Zero begins to sell more than Diet Coke, the company does not lose money from existing customers, and in fact likely gains new customers and brand loyalists.
Another example of a brand using corporate cannibalization to its advantage is Apple – a pro at using the “trade up” strategy mentioned above. When this tech giant releases a new iPhone, it’s technically competing with older iPhone models. The new model is more expensive but entices current customers to upgrade to the latest technology. Meanwhile, the price of the old model drops, incentivizing customers of Apple’s competitors to purchase older models, increasing the brand’s overall client base while also allowing it to phase out old products.
An example of unintentional product cannibalization is a pharmacy chain opening two locations within a few blocks of each other. Unless the chain has the traffic to justify two close locations, there are two likely scenarios.
In one case, location A might start to outperform location B, becoming more and more popular until location B folds in on itself. Alternatively, B could steal all of A's business just as easily as A could retain all of A's business and then A would fold in on itself. The retail chain has then wasted its money on a second location that didn’t last very long.
Opening location B could also divide location A’s sales, splitting the profits to the point that both locations can no longer sustain themselves. Depending on the size of the drugstore chain, this scenario could result in the entire company going under.
Marketing strategies to limit Product Cannibalization
Pay attention to profits
While cannibalization is typically measured by sales lost to the brand’s other products, the real measure is its effect on profits. When a product with a lower margin cannibalizes a product with a higher margin, it eats away at your bottom line.
But when a higher-margin product outpaces a lower-margin item, cannibalization may be worth the risk, particularly if it's drawing in new customers from other brands and those who are new to category altogether.
Test the messaging and positioning of new products before launch
Cannibalization doesn't just affect sales; it can also cause consumer confusion. Whether your brand makes cars, cameras, or clothing, if you don't sufficiently differentiate the products or fail to communicate the positioning effectively, having too many similar options is bound to confuse some consumers and dilute the brand's image.
Differentiation can come in the form of unique packaging, a different nutritional profile, new flavors, or unique branding. Using the hard seltzer example from above, you could also opt for a new usage occasion, positioning the lower calorie option specifically for those that want to partake in libations while still adhering to a low sugar diet.
Mitigate your risk of product cannibalization
Cannibalization is an inherent risk of bringing a new product to market. However, consumer research, done early and often can help confirm if a new product can coexist with the competition or if it’s likely to be replaced by something new.
Want to conduct market research to figure out if one of your products will end up cannibalizing another? Contact aytm today.
Thanks to our intuitive survey platform and access to an integrated panel of 100 million consumers, you can quickly find out exactly how customers will react to your new product and use the data to guide your strategic decisions.