Disadvantages
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.
Pros
- New offerings can revive interest in older product lines
- Bargain alternatives can prevent competitors from undercutting core brand
Cons
- Bargain alternatives may dilute the value of premium brands
- Market saturation may occur when multiple venues compete for customers
Examples of Market Cannibalization
Apple is an example of a company that ignores the risk of market cannibalization in pursuit of larger objectives. When the company announces a new iPhone, the sales of its older models immediately drop. However, Apple counts on its new phone to capture customers from its competitors so it can increase its market share.
Companies often risk market cannibalization to see a boost in their 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.
Is Product Cannibalization Good or Bad?
Product cannibalization is an expected consequence of launching a new product line. It may also be necessary so companies can innovate and grow their businesses. But, there are risks associated with market cannibalization, which means businesses should take precautions when executing this strategy. 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 the cannibalization rate, which is the percentage of new sales that 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.2
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.
The Bottom Line
Companies have different growth strategies they can explore to help them gain market share and increase their sales. At times, it may come at the expense of their existing product lines. When a company loses sales for an existing product to a newer one, it’s called market cannibalization. While it can help businesses innovate, increase their customer base, and release new product lines, there are risks with this strategy. Low-priced goods and market saturation can be hard to avoid. This is why companies should do their research first.