Cannibalization (marketing)
Encyclopedia
In marketing strategy
, cannibalization refers to a reduction in sales
volume, sales revenue, or market share
of one product as a result of the introduction of a new product
by the same producer.
While this may seem inherently negative, in the context of a carefully planned strategy, it can be effective, by ultimately growing the market, or better meeting consumer demands. Cannibalization is a key consideration in product portfolio analysis.
For example, when Coca Cola introduced Diet Coke, a similar product, this took sales away from the original Coke, but ultimately led to an expanded market for diet soft drinks.
Another example of cannibalization occurs when a retailer discounts a particular product. The tendency of consumers is to buy the discounted product rather than competing products with higher prices. When the promotion event is over and prices return to normal, however, the effect will tend to disappear. This temporary change in consumer behavior can be described as cannibalization, though scholars do not normally use the phrase "cannibalization" to denote such a phenomenon.
In e-commerce, some companies intentionally cannibalize their retail sales through lower prices on their online product offerings. More consumers than usual may buy the discounted products, especially if they'd previously been anchored
to the retail prices. Even though their in-store sales might decline, the company may see overall gains.
In project evaluation, the estimated profit generated from the new product must be reduced by the earnings on the lost sales.
Another common case of cannibalization is when companies, particularly retail companies, open sites too close to each other, in effect, competing for the same customers. The potential for cannibalization is often discussed when considering companies with many outlets in an area, such as Starbucks
or McDonald's
.
Cannibalization is an important issue in marketing strategy when an organization aims to carry out brand extension
. Normally, when a brand extension is carried out from one sub-category (e.g. Marlboro) to another sub-category (e.g. Marlboro Light), there is an eventuality of a part of the former's sales being taken away by the latter. However, if the strategic intent of such an extension is to capture a larger market of a different market segment
notwithstanding the potential loss of sales in an existing segment, the move to launch the new product can be termed as "cannibalization strategy". In India, where the passenger-car segment is going dramatically since the turn of this century, Maruti-Suzuki's launch of Suzuki Alto in the same sub-category as Maruti 800, which was the leader of the small-car segment to counter the competition from Hyundai is seen to be a classic case of cannibalization strategy.
See also: Product management
, New Product Development
Marketing strategy
Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.-Developing a marketing strategy:...
, cannibalization refers to a reduction in sales
Sales
A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
volume, sales revenue, or market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
of one product as a result of the introduction of a new product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
by the same producer.
While this may seem inherently negative, in the context of a carefully planned strategy, it can be effective, by ultimately growing the market, or better meeting consumer demands. Cannibalization is a key consideration in product portfolio analysis.
For example, when Coca Cola introduced Diet Coke, a similar product, this took sales away from the original Coke, but ultimately led to an expanded market for diet soft drinks.
Another example of cannibalization occurs when a retailer discounts a particular product. The tendency of consumers is to buy the discounted product rather than competing products with higher prices. When the promotion event is over and prices return to normal, however, the effect will tend to disappear. This temporary change in consumer behavior can be described as cannibalization, though scholars do not normally use the phrase "cannibalization" to denote such a phenomenon.
In e-commerce, some companies intentionally cannibalize their retail sales through lower prices on their online product offerings. More consumers than usual may buy the discounted products, especially if they'd previously been anchored
Anchoring
Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions.-Background:...
to the retail prices. Even though their in-store sales might decline, the company may see overall gains.
In project evaluation, the estimated profit generated from the new product must be reduced by the earnings on the lost sales.
Another common case of cannibalization is when companies, particularly retail companies, open sites too close to each other, in effect, competing for the same customers. The potential for cannibalization is often discussed when considering companies with many outlets in an area, such as Starbucks
Starbucks
Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 17,009 stores in 55 countries, including over 11,000 in the United States, over 1,000 in Canada, over 700 in the United Kingdom, and...
or McDonald's
McDonald's
McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 64 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by the eponymous Richard and Maurice McDonald; in 1948...
.
Cannibalization is an important issue in marketing strategy when an organization aims to carry out brand extension
Brand extension
Brand extension or brand stretching is a marketing strategy in which a firm marketing a product with a well-developed image uses the same brand name in a different product category. The new product is called a spin-off. Organizations use this strategy to increase and leverage brand equity...
. Normally, when a brand extension is carried out from one sub-category (e.g. Marlboro) to another sub-category (e.g. Marlboro Light), there is an eventuality of a part of the former's sales being taken away by the latter. However, if the strategic intent of such an extension is to capture a larger market of a different market segment
Market segment
Market segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function...
notwithstanding the potential loss of sales in an existing segment, the move to launch the new product can be termed as "cannibalization strategy". In India, where the passenger-car segment is going dramatically since the turn of this century, Maruti-Suzuki's launch of Suzuki Alto in the same sub-category as Maruti 800, which was the leader of the small-car segment to counter the competition from Hyundai is seen to be a classic case of cannibalization strategy.
See also: Product management
Product management
Product management is an organizational lifecycle function within a company dealing with the planning, forecasting, or marketing of a product or products at all stages of the product lifecycle....
, New Product Development
New product development
In business and engineering, new product development is the term used to describe the complete process of bringing a new product to market. A product is a set of benefits offered for exchange and can be tangible or intangible...