What Is Market Cannibalization?
Market cannibalization is a loss in sales caused by a company's introduction of a new product that displaces one of its own older products. The cannibalization of existing products leads to no increase in the company's market share despite sales growth for the new product.
Market cannibalization can occur when a new product is similar to an existing product, and both share the same customer base. Cannibalization can also occur when a chain store or fast food outlet loses customers due to another store of the same brand opening nearby.
- Market cannibalization is a sales loss caused by a company's introduction of a new product that displaces one of its own older products.
- Market cannibalization can occur when a new product is similar to an existing product and both share the same customer base.
- Market cannibalization is sometimes a deliberate strategy to blow out the competition while other times, it's a failure to reach a new target market.
- Market cannibalization is measured by the cannibalization rate, the number of lost sales for old products as a percentage of new sales.
- Products with similar branding are most at risk of cannibalization. It is important to conduct thorough market research and testing to prevent cannibalization.
How Market Cannibalization Works
Also referred to as corporate cannibalism, market cannibalization occurs when a new product intrudes on the existing market for an older product. By appealing to its current customers instead of capturing new customers, the company has failed to increase its market share while almost certainly increasing its costs of production.
Marketing cannibalization is often done unintentionally when the marketing or advertising campaign for new products draws customers away from an established product. As a result, market cannibalization can hurt a company's bottom line.
However, market cannibalization can be a deliberate strategy for growth. A supermarket chain, for example, might open a new store near one of its older stores, knowing that they will inevitably cannibalize each other's sales. However, the new store will also steal market share from nearby competitors, even driving them out of business eventually.
Cannibalization as a marketing strategy is generally frowned upon by stock analysts and investors, who see it as a potential drag on short-term profits. As companies design their marketing strategies, marketing cannibalization needs to be avoided, and individual product sales need to be closely monitored to determine if cannibalization is occurring.
For example, when looking at the fast expansion of chains such as Starbucks or Shake Shack, these companies constantly weigh the opportunities for sales growth with the risks of local market cannibalization.
Types of Market Cannibalization
One familiar type of cannibalism occurs every year when companies like Apple and Samsung release new versions at the expense of older models. Although these new releases cut into sales of the older models, which may still be popular, they also attract new buyers from other brands.
Cannibalization Through Discounts
Many retailers regularly put products on sale, either to increase cash flow or to make room for newer products. But regular discounts can have a cannibalizing effect, if buyers start to expect routine discounts. If customers refuse to buy items at full price, the retailer may be forced to offer increasingly steep discounts.
Cannibalization Through eCommerce
Many traditional retailers now offer online sales, which could come at the expense of their brick-and-mortar stores. However, these losses could be a net benefit, if online shopping attracts new customers from outside the retailers' normal base.
How to Prevent Market Cannibalization
In order to prevent new products from cannibalizing on older ones, it is important to consider how the two products are branded. Products with similar pricing and placement—such as new flavors or added features—pose a high risk of market cannibalization, according to the Nuremberg Institute for Marketing Decisions.
This risk can be reduced through more distinctive branding—for example, creating inexpensive "fighting brands" to compete with low-cost competitors without cannibalizing from the premium brands. New offerings can also be carefully timed to avoid disrupting older offerings.
When Market Cannibalism Is Unavoidable
Sometimes, market cannibalism cannot be avoided. Every major department store now operates an online store, knowing full well that its sales can only cannibalize its brick-and-mortar business. Their only other choice is to allow internet retailers to continue taking market share away from them.
Macy's, as of 2021, is in the process of closing 125 brick-and-mortar stores nationwide, according to CNBC. Meanwhile, Amazon is busy opening a chain of convenience stores called Amazon Go. Will the new stores cannibalize the website? It's not likely since Amazon Go only sells items that can't be purchased on the website, namely ready-to-eat fresh meals.
Advantages and Disadvantages of Market Cannibalization
Market cannibalism is not always to be feared, especially if it can protect or expand a company's market share. Apple founder Steve Jobs is reported to have embraced the practice, saying: "If you don't cannibalize yourself, someone else will." Although the newly-released iPhone did cannibalize buyers from older iPods, they made a bigger dent in Apple's competitors.
Market cannibalization may also be an appropriate defensive measure against competitors, as when Airbnb started cutting into the margins of the hotel business. Marriott then started their own home rental business, which cannibalized from their own hotel revenue—but ultimately denied market share to Airbnb.
But there are also major risks to market cannibalism. High-end retailers should be cautious about introducing low-priced versions, which could dilute the value of their premium brands.
There is also a danger of market saturation, as might occur when two identical fast food restaurants appear on the same block. Depending on local market dynamics, the brand might end up competing against itself.
As with other marketing decisions, thorough market research and careful timing can make all the difference between positive and negative market cannibalization.
New offerings can revive interest in older product lines.
"Bargain" alternatives can prevent competitors from undercutting your core brand.
Some bargain alternatives may dilute the value of premium brands.
Market saturation may occur when multiple venues compete for the same customers.
Examples of Market Cannibalization
Apple is an example of a company that has ignored the risk of market cannibalization in pursuit of larger objectives. When Apple announces a new iPhone, the sales of its older iPhone models immediately drop. However, Apple is counting on its new phone capturing competitors' current customers, increasing its overall market share.
Companies often risk market cannibalization in hopes of gaining a bounce in overall market share. For example, a company that makes crackers may introduce a low-fat or lower-salt version of its brand. It knows some of its sales will be cannibalized from the original brand, but it hopes to expand its market share by appealing to health-conscious consumers who otherwise would buy a different brand or skip the crackers altogether.
Market cannibalization is measured by the Cannibalization Rate:
- Cannibalization Rate = 100 x (Lost sales on old product) / (Sales of new product)
Product Cannibalization FAQs
Is Product Cannibalization Good or Bad?
While product cannibalization is an expected consequence of launching a new product line. While a poorly planned entry may harm sales of existing products, a well-planned market launch can help a company gain more overall market share.
How Can You Measure Product Cannibalization?
Product cannibalization is represented by cannibalization rate, the percentage of new sales which occurred at the expense of old product lines. The cannibalization rate is calculated by dividing the lost sales for older products by the total sales of the new product.
Why Is Product Cannibalization Important?
Product cannibalization is an important factor in brand marketing. Since any new launch runs the risk of poaching customers from other product lines, it is essential to carefully research the market and conduct thorough testing to determine if the risks outweigh the benefits.