What Is Market Cannibalization?

What Is Market Cannibalization?

Let me explain market cannibalization directly to you: it's when a company's sales and demand for an existing product drop because they've introduced a new one that replaces it. This happens if the new product is too similar to the old one and they both draw from the same customer base. As a result, the company's overall market share doesn't grow, even if the new product sells well. You might also see this in chain stores or fast-food outlets where a new location nearby steals customers from an existing one of the same brand.

Key Takeaways

Here's what you need to grasp: market cannibalization is essentially a loss in sales from introducing a new product that displaces your own older one. It often stems from similarities between products sharing the same customers. Sometimes it's intentional to edge out competitors, other times it's a misstep in reaching new markets. You measure it with the cannibalization rate, which is lost sales on old products as a percentage of new sales. Products with similar branding are especially vulnerable, so I recommend companies invest in market research and testing to avoid this.

How Market Cannibalization Works

Market cannibalization kicks in when your new product encroaches on the market of an older one from your own company. Instead of pulling in new customers, it appeals to your current ones, so your market share stays flat while production costs rise. Often, this is unintentional, like when marketing for the new item pulls customers away from the established product, ultimately hurting your bottom line.

That said, it can be a calculated strategy for growth. Take a supermarket chain opening a new store near an old one—they know sales will cannibalize each other, but the goal is to snatch market share from competitors and potentially drive them out. Stock analysts usually frown on this because it can drag short-term profits. As you design strategies, avoid cannibalization by monitoring product sales closely. Companies like Starbucks and Shake Shack do this all the time, balancing growth with local market risks.

Special Considerations

Sometimes you can't avoid market cannibalization. Every big department store runs an online presence, fully aware it cannibalizes their physical stores— the alternative is letting online rivals take your share. Look at how e-commerce is forcing retailers like Macy's to close stores nationwide.

And just so you know, market cannibalization is also called corporate cannibalism.

Types of Market Cannibalization

There are a few types you should be aware of: planned cannibalization, discount-related, and through e-commerce. Planned cannibalization is common with tech giants like Apple and Samsung releasing new models that cut into older ones' sales, but they draw in buyers from competitors too. Discount cannibalization happens when regular sales train customers to wait for deals, forcing deeper discounts over time. E-commerce cannibalization affects brick-and-mortar stores when online sales pull away customers, though it might net new ones from farther away.

How to Prevent Market Cannibalization

To prevent this, think about branding differences between products. Similar pricing and placement, like new flavors or features, heighten the risk, per research from the Nuremberg Institute. Reduce it with distinctive branding, such as creating budget 'fighting brands' to tackle low-cost rivals without hurting your premium lines. Timing new launches carefully also helps avoid disrupting older products.

Advantages and Disadvantages of Market Cannibalization

Don't always fear market cannibalization—it can protect or grow your market share. Steve Jobs at Apple embraced it, saying if we don't cannibalize ourselves, someone else will. New iPhones eat into old models but hit competitors harder. It can defend against threats, like Marriott's home rental push against Airbnb, which cannibalized hotels but blocked market share loss.

On the flip side, risks include diluting premium brands with cheap versions or saturating markets, like identical fast-food spots on the same block competing against themselves. Market research and timing are key to turning it positive.

Examples of Market Cannibalization

Apple exemplifies ignoring cannibalization risks for bigger goals—new iPhone announcements tank older model sales, but they aim to steal from competitors and boost market share. Similarly, a cracker company might launch low-fat versions, knowing it'll cannibalize the original but hoping to attract health-focused buyers who might otherwise skip or choose rivals.

Is Product Cannibalization Good or Bad?

Product cannibalization is a natural outcome of new launches and often necessary for innovation and growth. But it carries risks, so take precautions. A bad plan hurts existing sales, while a good one expands overall share.

How Can You Measure Product Cannibalization?

Measure it with the cannibalization rate: divide lost sales on old products by new product sales, then multiply by 100 for the percentage.

Why Is Product Cannibalization Important?

It's crucial in brand marketing because new launches risk poaching from your own lines. Research and test thoroughly to weigh risks against benefits.

The Bottom Line

Companies pursue growth strategies to gain market share and sales, sometimes at the cost of existing products—that's market cannibalization. It aids innovation and customer expansion, but watch for risks like low-priced goods or saturation. Do your research first.