Cannibalization of Sales- Similar Products Affecting Business
Posted in Marketing & Strategy Articles, Total Reads: 577
, Published on 22 August 2016
Many a times companies launch a new item in excitement and anticipate increase in their market share. However, it has been observed that they soon start getting concerned over the fact that whether the new item will eat up the profits of other items of the company because both are quite identical. It is a general misnomer among people that Cannibalizing the profits of other items via launch of a similar new item is a bad move. However, in today’s changing market dynamics, Cannibalization if implemented thoroughly and effectively can add on to the profits of the organization.
Cannibalization is a marketing buzzword in today’s era and refers to the reduction of sales of one product due to the launch of any new identical product by the company. We can find numerous examples of Marketing Cannibalization today. A very good example is that of the launch of the eco-friendly cleaning products by the same companies which have been dealing with the traditional ones. This has led to a reduction in profits from the traditional cleaners but has seen a huge upsurge in the newly launched, so-called Green-Cleaners.
Cannibalization is a very unique concept and has been very much successful today. However, as every theory has limitations, same is the case with Cannibalization. It doesn’t work in cases where the new product launch will affect the overall profits and sales of the product line. As always advisable, the organization should always go for market-testing to get a feel of the market before launching the product in a full-fledged way in the market. Going other way may lead to epidemic results, especially when the existing product has large customer loyalty.
There are also numerous points that needs to be considered while cannibalizing a product. If the organization feels the new launch will further increase the profits of the existing product and gets if it’s evident via proper market-testing, only then they should go ahead. One classic example where Cannibalization failed is the case of Samsung Galaxy S series and Samsung Galaxy Note. Both of the devices carried almost similar features and hence, Galaxy S failed to increase the profits of Galaxy Note as the customer-base were reluctant to go for the change. Samsung is coming up again with another cannibalizing product, Samsung Galaxy Mega and how the market reacts to it will be very interesting to watch.
Cannibalization if visualized quantitatively will bring out the real picture. Hence, we should look into some mathematical calculations and try to realize the relevance of the concept.
Let’s consider an organization is producing Product A and it generates a sale of 1000 units at a profit of Rs. 100 per unit. Hence, the total profit for Product A accounts to Rs. 100000. Now, the organization launches another identical product B in the market. The finance and marketing experts of the company project that product B sales will account to 200 units with a profit of Rs. 150 per unit, accounting to a profit of Rs. 30000.
Also we need to consider that due to the launch of Product B, sale of Product A has been reduced by 200 units. Hence the new profits for the organization from Product A is 800*100 = Rs. 80000 and from Product B is Rs. 30000 accounting to a total profit of Rs. 110000. Hence, we can easily observe the power of cannibalization and how it increased the company profits by 10 percent.
Brand Equity and Brand Loyalty are the market terms which every company longs for. It is the very basis which largely determines the profitability for the company and hence, indirectly related to Cannibalization. The better the Brand Loyalty of a company, the better will be the probability of customers willing to try any newly launched product of the brand. Also, we should realize that launching a new product with a new Brand name and that too only to replace completely/partially an existing product will prove to be a very costly affair and hence, not a feasible option. Hence, Brand Equity is very important to implement the Cannibalization theory and make the best out of it.
While we talked all about Cannibalization and its positive aspects, it needs to be handled with care. Many a times, companies go over-excited on implementation of such disruptive marketing theories and crash-land with their strategies. A holistic overview and a proper balance is must in executing the strategies to ensure stability as well as gradual growth in profits. Some of the necessary steps to ensure a smooth implementation of Cannibalization can be: Identifying specific product markets, analyzing market demand, setting priorities for individual markets, Estimating the extent of competition and Evaluating various product marketing strategies.
Finally let’s visualize Cannibalization through some market examples and embrace the very concept.
• A very classic example can be that of Hyundai Santro. Santro, once a flagship automobile for Hyundai was very beautifully cannibalized by Santro Xing. Thus, the customers who were to buy the old Santro started buying the new Xing and hence the car was slowly replaced by the newer Xing version.
• Similar is the case with Videocon. They adopted the strategy of entering the TV market with a product which had basic features at a relatively lower price than their customers. Once the brand gained popularity in market, they gradually introduced the sophisticated models and also increased the price to cover the customer-base from both medium as well as high range segments.
• What can be a better example than Apple, the tech-giant which believed in the idea of cannibalization and introduced the feature-rich iPhones which completely ate Apple’s lower-end products like iPods and all its series.
Usually cannibalization is not perceived with positive insight. Because market cannibalization when done without future implications can be very fatal and hence should be properly planned and tested in market before executing it in market in a full-fledged manner. For a launch of any new product in market, extensive thoughts should be given beforehand to assess if this would affect the sales of existing product of the same company. If the strategy behind new product launch is to increase sales independently then exhaustive measures should be taken into account while designing the product, so that in no way it affects the sale of existing product. If a company wants market to adopt their product with improved version, then their finance and marketing divisions should be efficient enough in determining the amount of sales it’s going to affect for the existing product. The better the estimation, the higher are the chances of a successful Cannibalization implementation.
This article has been authored by Ruchi Tallewar from IIM Raipur