In marketing strategies, cannibalization refers to decreasing sales revenue, volume, or market share. This happens because of a company introducing a new product. In E-commerce, some companies approach intentional cannibalization to reduce the prices of their offerings. This allows them to benefit from the host of customers that gather to buy the discounted product.
Therefore, infusing a momentary change in consumer behavior is cannibalization. When evaluating projects, the estimated profit that you generate from a new product needs to decrease by the earnings from the sales that have been lost.
Cases of Cannibalization for Companies
One common cause of cannibalization occurs when companies do not plan out their expansion as well, opening their retail stores in proximity. Having stores too close to each other can mean that two branches of the same store can compete against each other to get more customers. The potential for cannibalization is imminent when you can expand at a location with many retail stores.
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Cannibalization is a critical challenge when executing strategies for marketing, especially when an enterprise needs to extend its brand’s output. When you carry out brand extension from one sub-category to another, there is a chance that part of the organization’s workforce will take over the next.
Gradual Plan Obsolescence
This process helps overcome issues of cannibalization from an existing marketplace. The reason for gradual plan obsolescence includes inventory levels, contractual arrangements, and the profit margin for the existing product is higher than what the new product anticipates.
In another situation, it might be that the product loyalty may not easily transfer to the new product. Nevertheless, if the profit margins of the new product are better than the existing one, the company does not mind having new products cannibalize the older ones.
However, companies welcome cannibalization when you reinforce the brand by demonstrating continual product improvement with new products. Introducing new products can help increase the brand’s value in the customer’s mind.
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In some circumstances, cannibalization allows you to pursue new market segments and bring out new products. This can help you attract a new audience. In those instances, you can expect there to be some loss of sales due to cannibalization.
Cannibalization as a Competitive Strategy
Cannibalization, in some instances, can be a great way to compete with competitors. You may bring out a product that directly competes with them. In simple words, it allows you to steal your sales before your competitors can get their hands on them. Regardless of the benefits, there are certainly some instances where cannibalization can be a problem.
The analysis of cannibalization compares the potential revenue in profits of an existing product before you introduce a new one.
When executing this analysis, a business hopes that the profit is greater when introducing a new product. At PREDIK Data-Driven, we can help you carry out cannibalization analysis. This will provide you with the key insights that dictate a successful marketing and expansion strategy.