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.
What is Market Cannibalization?
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
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.
How to Prevent Market 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.
FAQs
What is cannibalization in the context of business?
Cannibalization in business refers to a situation where the introduction of a new product or service from a company diminishes the sales or demand for its existing products or services, particularly when the new offering competes directly with the company’s own products or services.
How does cannibalization occur in business?
Cannibalization can occur when a company introduces a new product or service that overlaps significantly with its existing offerings. Customers may switch their purchases from the existing products to the new one, leading to a reduction in sales and revenue for the original products.
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