Market Cannibalization

A decrease in demand for a company’s original product in favor of its new product

What is Market Cannibalization?

Market cannibalization refers to a phenomenon that happens when there’s a decreased demand for a company’s original product in favor of its new product. When cannibalization occurs, the business experiences losses not just in sales volume but also in revenue and market share. Due to cannibalization, some companies opt not to release their new products because they don’t want the market share of their existing products to decline.

 

Market Cannibalization

 

Market Cannibalization Explained

Market cannibalism is also known as corporate cannibalism. When a company manufactures a new product or introduces a new service, the goal is to attract a few of their existing customers and a large number of new customers.

Unfortunately, things don’t always go as planned. Sometimes, the release of the new product into the market attracts a large proportion of its current customer base. Failing to increase the company’s market base results in corporate cannibalism.

For illustration purposes, consider Company ABC, which is known for making high-end wristwatches. In an attempt to increase its customer base and subsequent revenues, ABC decides to manufacture another line of products – belt fob watches.

The new watch becomes a hit among buyers, and the company sees a significant increase in its sales volume. However, it does not take long before the owners realize that sales of their original watches have taken a sharp fall. The reason? Their initial customers have stopped purchasing the older watch as they prefer the new belt-fob type.

 

Importance of Market Cannibalization

As seen in the example above, cannibalization can cost a company a significant amount of revenue. It often happens when a company fails to perform due diligence before launching its new product.

In some instances, the new product does not only hurt a company’s sales volume and revenue. The worst-case scenario is that the original product gets phased out of the market entirely.

However, sometimes a business intentionally cannibalizes its existing product with a new one. Why would a company introduce a new product line knowing very well that it’s going to jeopardize the existing one? – As a strategy for growing and expanding its operations.

Assume that ABC, the watch-making company, has been producing luxury watches for a while. However, for some reason, the watches don’t appeal to the intended target audience. Instead of producing a completely new product, the company decides to tweak its existing lux watch. The improvements are meant to attract the same consumers in the market.

In this case, ABC deliberately launches a new line of watches because it aims to retain its current customers, as well as attract new ones.

 

Example of Market Cannibalization

There are certain situations where market cannibalization cannot be avoided. For example, we now see tons of department stores that operate as online businesses as well. The store owners already understand the risk that its online sales can jeopardize those of its brick-and-mortar stores.

A good example of a company that uses corporate cannibalization to its advantage is Apple Inc. When the tech giant invents a new iPhone, it doesn’t shy away from releasing it into the market. In fact, it ensures that their newer version is available in all their chain stores.

Obviously, this causes the sales of their older iPhones to drop significantly. However, Apple makes up for this loss by capturing its competitors’ current customers, hence increasing its client base.

In addition to Apple, Amazon is another company that has dealt with cannibalization very smartly. It runs an online retail company where consumers can purchase different goods. However, at the same time, it also runs a chain of stores known as Amazon Go.

Do sales of Amazon’s physical stores cannibalize their online operations? No. That’s because Amazon Go only trades in products that cannot be sold on their site, specifically, freshly-prepared meals.

 

How to Prevent Market Cannibalization?

Another way of dealing with market cannibalization is to prevent it from happening in the first place. Company owners don’t need to stop making their existing products entirely. There are other strategies they can use to prevent cannibalization:

 

1. Identify the specific markets for each of the products

In such a way, it’s easy to determine what gap the existing product fills and the specific consumers that the item serves. All of this is information that company owners need to have before deciding to launch a similar or new product.

 

2. Assess the possible market demand for the proposed new product

In particular, determine how much net income the new product is likely to bring in. This means that one will need to evaluate the production costs incurred versus the benefits, which are in the form of new revenue.

It’s important to note that new products don’t always lead to higher revenue. They may increase sales volume in the short term but cause revenue to fall in the long term. In such a case, then a company is better off sticking with their original product.

 

Summary

Market cannibalization occurs when a new product appeals to a company’s current clientele instead of an additional segment of the market. When cannibalization happens, it leads to a decline in the demand for the original product. This translates to decreased sales volume and revenue, as well as a reduction in market share.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

  • Click and Mortar
  • Demographics
  • Normal Goods
  • Same-store Sales 

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