Market Cannibalization
Market cannibalization refers to the phenomenon where a new product or service introduced by a company eats into the sales of one or more of its existing products or services. This often occurs when the new offering appeals to the same customer base as the older offerings, causing the company’s overall sales to remain flat or even decline despite the introduction of the new product.
Understanding Market Cannibalization
Market cannibalization typically happens in markets where the new product is not sufficiently differentiated from the existing products. Instead of attracting new customers or addressing a previously underserved market segment, the new product attracts the same customers who would have otherwise purchased the older product. This can reduce the overall profitability of the company because the new product might have lower margins, and the company incurs additional costs related to marketing, production, and distribution.
Causes of Market Cannibalization
-
Poor Market Segmentation and Targeting: When a company fails to distinguish between distinct market segments and does not properly target its offerings, new products may unwittingly appeal to the same customers as existing products.
-
Insufficient Differentiation: If a new product is not sufficiently different from the company’s existing products, customers have little incentive to switch, causing internal competition.
-
Pricing Strategies: Price reductions for new products can attract customers from existing products, leading to cannibalization.
-
Brand Loyalty and Equity: Established brands may have strong consumer loyalty, making it difficult for new products under the same brand to attract new customers without cannibalizing existing ones.
Examples of Market Cannibalization
One of the most cited examples of market cannibalization is Apple’s launch of the iPad. The introduction of the iPad impacted the sales of the MacBook as consumers opted for the new tablet instead of purchasing a laptop. While Apple gained revenue from iPad sales, it also noted a decline in MacBook sales, illustrating internal market competition.
Measuring Market Cannibalization
To manage and mitigate market cannibalization, companies need to measure the extent to which a new product is affecting the sales of existing products. This can be done through:
- Sales Analysis: Comparing sales figures before and after the launch of the new product.
- Customer Surveys: Understanding customer preferences and their reasons for switching from one product to another.
- Market Share Analysis: Observing changes in market share among the company’s products.
- Profit Contribution Analysis: Evaluating the impact of the new product on the overall profitability of the company.
Strategies to Mitigate Market Cannibalization
-
Market Segmentation: Clearly distinguish market segments and target the new product to a different market segment from existing products.
-
Product Differentiation: Ensure that the new product offers unique features or benefits that distinguish it from existing products.
-
Bundling and Cross-Promotions: Create product bundles or cross-promotions that encourage customers to purchase multiple products, reducing the likelihood of one product cannibalizing another.
-
Pricing Strategies: Carefully plan the pricing strategies to ensure that new products do not undercut the demand for existing products.
-
Brand Positioning: Protect brand equity by positioning new products differently within the brand portfolio.
Case Studies
Apple Inc.
Apple offers multiple case studies in market cannibalization. Aside from the iPad and MacBook scenario, another instance occurred with the launch of different models of the iPhone. Higher-spec models often lead to a decline in sales of previous models, though Apple compensates by targeting different market segments with varying price points.
Nike Inc.
Nike experienced market cannibalization with the introduction of different models of running shoes. For instance, the introduction of the Nike Free line impacted the sales of older running shoe models. Nike mitigated the impact by targeting different consumer preferences, from professional athletes to casual runners, and emphasizing unique features in each product line.
Coca-Cola Company
When Coca-Cola introduced Coke Zero to complement Diet Coke, they encountered market cannibalization. Diet Coke, primarily marketed to women, lost part of its consumer base to Coke Zero, which appeals to a broader demographic including men who were less likely to drink Diet Coke.
Conclusion
Market cannibalization presents both risks and opportunities. Companies need to carefully consider their product development and marketing strategies to minimize the negative impact of internal competition. By understanding the dynamics of market cannibalization and applying effective measures, businesses can introduce new products while maintaining and growing their overall market share and profitability.