What is product cannibalization?
Product cannibalization marks the business scenario under which products within the same portfolio compete with each other risking to result in a loss in sales. In marketing, it marks the drop in market share, sales or revenue as a result of launching a new product by the same manufacturer or, in case of retail, adding a new product similar to the ones of an existing portfolio.
Most often, cannibalization is considered as an explicitly negative phenomenon. Imagine a new product is added to a retailer's portfolio and it does not contribute to the market share increase but, instead, appeals only to current customers undermining the demand for existing products. This could be a negative illustration of how the phenomenon works.
To put it simply, cannibalization is a phenomenon opposite to complementarity. The latter marks the high probability that the purchase of a particular product would most likely increase the sales of another product. In contrast to complementarity, product cannibalization means that the increased demand for one product would cause a drop in demand for similar products. Speaking of cannibalization in retail, the major challenge is to identify the real and often implicit cross elasticities of demand within their product portfolio.
How to avoid cannibalization?
Above we’ve mentioned some examples of how product cannibalization may impact the business in a negative way. Such cases impel retailers to seek effective means aimed at preventing the negative impact. Even though the cannibalization mitigation strategy in each specific case may differ significantly depending on product, industry or other factors, there are some essential steps that can help retailers of all types and industries. Here they are:
Examine the market carefully and determine specific segments for each product within your portfolio. Doing this helps to obtain a comprehensive vision of your market positioning and improve the decision-making process while adding new products to the portfolio.
Analyze the short- and long-term market demand forecasts before launching new products. The point here is that sometimes a new product might have a higher rate in a number of sales items, yet generating less revenue in total compared to existing similar products.
Conduct a comprehensive data-driven basket analysis to identify both cannibalization and complementarity products. Sometimes, the sales cross dependencies within the portfolio are less obvious than they might appear at first glance. Hopefully, with the use of big data, even the most implicit connections would no longer be unnoticed.
Identify the unique product features demanded by customers and make sure new products contain these features. Adding products with unique features would help to differentiate positioning and minimize the risk of sales decrease for existing products.
Identify and protect the key value items (KVIs) within your portfolio. Draw a red line separating products or categories which are strategic for your business health to keep them out of cannibalization risks.
Why is cannibalization not always bad?
In every case, product cannibalization brings risks to a retailer. And that's probably the main reason forcing businesses to minimize the probability of cannibalization or avoid it completely. Yet, in some cases, cannibalization is not only inevitable but it can even contribute to the business's strategic goals achievement. Let's look at two major examples showing how cannibalization can boost the business:
Brand extension and new market entry. Willing to increase their customer base, retailers have to diversify their assortment range. In this case, sales cannibalization for existing products could hardly be avoided. The good news is that the long-term benefits could outweigh the short-term loss. A simple example: the sales of original Cola decreased when Coca-Cola started producing a Zero Sugar Cola, but the company's total revenue and customer base boosted.
Interfirm competition and product portfolio analysis. Controlled product cannibalization could also be used as a 'crash test' if a retailer needs to optimize the assortment management by finding which similar products should be either better promoted, substituted, or removed completely from the portfolio.
The point of these examples is simple: sustainable management of product cannibalization could turn potential risks into an advantage. We're now going to dive deeper into practical means of effective cannibalization management.
Sustain cannibalization: pricing is the key
Pricing has always been a foremost and effective means to manage product cannibalization. Pricing is a tool that can make cannibalization controllable or, in contrast, contribute to its devastating impact. The choice lies with each retailer. So, how to make cannibalization work for you?
To sustain cannibalization with pricing, retailers should be aware of all cross dependencies between the products they sell. Today, the advanced pricing solutions, like Competera pricing platform, are capable of processing thousands of data points finding even the most implicit, yet impactful connections between the demand on various products within the portfolio. As a result, pricing solutions powered by ML can predict how exactly a particular price change might contribute to the product cannibalization.
Each company has its own approach to evaluate the cross dependencies within the portfolio. At Competera, we use the latest-generation neural network capable of processing billions of data points to ensure the integrity of results with the price effect prediction accuracy of 90-98%. The solution’s workflow is divided into two stages. First, the platform calculates the precise effect of price changes on demand and sales. Then, state-of-the-art algorithms use the results of the first stage to craft optimal prices for the whole portfolio minimizing the potential harm of cannibalization.
Interested in real-life facts and numbers? Here is one example: Competera has recently helped a leading Eastern European apparel retailer Intertop to get to the point of 10.3% gross profit saving along with 200 BPS of profit margin saving after only 6 weeks of using the platform.