This may sound familiar to you: your company launches a new product with improved features. Sales skyrocket, a success, right? Or so it would be, if it hasn’t taken sales away from existing products within the same category, resulting in an overall reduction of revenue. It is easy to put the pieces together: this seems to be a classic case of product cannibalization.
What is product cannibalization?
Product cannibalization arises when a new or existing product replaces or reduces sales of other products, leading to a decline in revenue. As the “cannibalization” term in the name suggests, a product “eats into” the sales of the others.
Let’s say a consumer packaged goods (CPG) company has an existing beverage within the carbonated soft drinks category that generates $100 million dollars in sales per year. The company then launches a new beverage within the same category with a different flavor, which generates $60 million in sales in its first year. However, the sales of the existing beverage are reduced to $40 millions.
In this example, it is easy to identify the cannibalization, but the same is not true when you deal with hundreds or thousands of new product launches, packaging changes, or new flavors. Cannibalization can be that silent ghost that is haunting your performance and you are not even aware of it.
Not for nothing, product cannibalization is considered one of the five sales volume effects that every promotions manager should know and monitor. After all, it has a significant financial impact, as it requires a greater promotional investment to avoid the drop in sales volume of cannibalized products.
How to avoid product cannibalization?
Retailers and CPG brands have several strategies at their disposal to help them avoid product cannibalization:
Segment your market
Besides being a basic step of any go to market strategy, segmentation process helps divide the market in homogeneous groups to identify which are suitable for your products.
Target your customers
After segmentation, targeting is the natural next step. By focusing on different customer segments for different products, you ensure that new products will not compete directly with existing ones.
Have a unique positioning
You may have two different products, each targeting a different market. However, if you communicate the same attributes, cannibalization could arise. Carefully positioning of products can help differentiate them and therefore reduce the risk of cannibalization.
Differentiate your products
Similar to positioning, unique packaging and other product features can help to target specific customers. Therefore, helps minimize competition between products within the same category and between customers of the same sales channel.
Determine the right timing
As obvious as it sounds, launching new products at a different time can also help to reduce the risk of cannibalization. A white space analysis can help identify which product, variety, flavor, packaging, and price are right at launch to avoid other products cannibalization.
Implement pricing strategies
Pricing strategies can be used to encourage customers to try new products without negatively impacting sales of the existing products. Once again, a white space analysis is a useful tool for defining your strategies.
Create a pricing structure
Also known as price architecture, a pricing structure provides commercial teams with data-driven guidelines that can help minimize the risk of cannibalization. For example, by avoiding unplanned discount pricing changes.
Diversify distribution Channels
Using different channels for different products not only helps to reduce the risk of cannibalization, but is strategic when targeting specific customers segments. Again, knowing your customers makes the difference.
Control promotion calendar
According to Simon-Kucher & Partners, retailers must pay attention and plan their promotion calendar. If two or more competing products run a similar promotion at the same time, they will cannibalize both sales and profitability.
Not for nothing, one of the greatest achievements that a retail company can attain in terms of promotion management is to have effective control of the promotional calendar and be able to generate a sales forecast for each promotional mechanism.
There are platforms that simplify the control of promotion calendars and sales forecasting through advanced technology, such as Kuona’s artificial intelligence platform. Contact us to learn more about it.
Is cannibalization a necessary evil?
Cannibalization is not the outcome most businesses are looking for. However, it is not always negative. Actually, there are some instances where it can even be beneficial. Here are a few examples:
Introducing innovation
When a company introduces innovative features that significantly improves existing products, it may cannibalize its own sales. However, in the long run, it helps to strengthen the company’s position in the market.
Launching more profitable products
A company may launch a new product that competes with existing products within the same category. If this new offer provides a higher margin, it may be reasonable to allow a reduction in the sales volume for the existing products. However, it is necessary to closely monitor the numbers, so that sales do not drop to levels where profitability is affected.
Expanding your market
Seeking new customer segments with new products may cannibalize sales of existing products, but can be beneficial in the long run. A well-known example is when Coca-Cola launched Coke Zero. While this took away sales from the Diet Coke brand, it attracted a new customer segment —18 to 25 years old males concerned about their sugar intake. This led to an overall increase of sales.
Maintaining market share
In highly competitive industries —such as the soft drink industry—, a company may need to launch a product that cannibalizes its own sales to avoid losing market share against a competitor's new product. This tactic seeks to maintain the position in the market and to keep the profits for the same company.
Before introducing any new products, companies need to weigh the short-term costs against the potential long-term benefits of product cannibalization.
Artificial Intelligence: Key for Understanding your customers
Needless to say, product cannibalization is a common challenge faced by CPG brands and retailers today. While not always a negative phenomenon, it requires a deep understanding of your customers to leverage cannibalization as a strategic tool. In this context, Artificial Intelligence (AI) has become the perfect technology for providing insights and data-driven decision making.
By analyzing customer data and behavior patterns, AI algorithms can help retailers and CPG brands anticipate how a new product launch might impact existing product sales. Additionally, it can help with customer segmentation, which is a crucial step in avoiding cannibalization. Finally, AI can help with supply chain optimization, by predicting demand for new products.
If you need a strategic partner to face product cannibalization, Kuona’s Artificial Intelligence platform is at your disposal. Please, contact us for further counseling.