What is Market Cannibalization?
Market cannibalization refers to a loss in revenues that companies suffer due to a new product. This new product disrupts a company’s existing products’ position in the market, which leads to losses for the company. Overall, the cannibalization or competition between two products does not increase the company’s market share despite the new product.
Market cannibalization can occur due to various reasons. For example, launching a new product can lead to a decreased demand for a company’s existing products. Due to market cannibalization, companies suffer losses in sales and declining market shares. This phenomenon may cause some companies to stick with their existing products and not release new ones.
Market cannibalization is generally disadvantageous to a company. It does not provide any increased profits. Instead, it leads to a decrease in revenues, translating to a future decline in earnings. Market cannibalization creates competition within a company’s own products in the market. Due to this, the company suffers from a decreased market share.
How does Market Cannibalization work?
Market cannibalization occurs when a company launches a new product in the market. This new product then interferes with the company’s existing product shares. This process may occur in markets where the company has several products. When one of these products becomes older, customers will lean towards the new items rather than buy the older ones.
The company will experience a growth in sales for the new product. However, it will also lose its market share for the existing product, leading to a decrease in revenues and profits. The primary cause of market cannibalization is companies appealing to their current customers. When companies fail to attract new customers, they will suffer from the introduction of new products.
For any company, launching a new product while also maintaining its existing market share is ideal. However, when its products interfere or compete with each other in the market, it causes adverse effects. This phenomenon has become prevalent in sectors such as the technology or food sector. These sectors experience a decline in revenues for existing products as new products take the market share.
What is Cannibalization Rate?
Cannibalization rate is the measurement of market cannibalization for a company. It is the percentage of existing product sales which the introduction of a new product has impacted. A company that considers releasing new products calculates the cannibalization rate. For almost any similar product introduced in the same market, market cannibalization is inevitable.
Therefore, companies calculate the cannibalization rate to determine if the market cannibalization will be acceptable. This rate is crucial to companies when making strategies about introducing similar or substitute products. For example, Apple, Inc. will calculate the cannibalization rate for its iPhone 13 product to see how it will impact its iPhone 12 product sales.
Overall, the cannibalization rate represents the effects that introducing a new product will have on current products. Companies measure this impact in terms of sales. Some companies produce new and improved products as a part of their strategy to maintain existing market share. However, if introducing new products has a significant impact on its current products, these companies may reconsider their options.
How to calculate the Cannibalization Rate?
Estimating the cannibalization rate for a new product is challenging. Companies need to have solid estimates before calculating the cannibalization rate. For that, they need the sales of the new products and its existing products. For companies calculating the amount before the launch of a new product, forecasting the sales will be critical.
Once companies have the information needed, they can calculate the percentage using the cannibalization rate formula given below.
Companies can also use another formula for cannibalization rate that will provide the same result, given below.
Example
A company, ABC Co., is looking to introduce a new product in the market. The company believes that this product will help it increase its competitive advantage in the market. However, ABC Co. also has current products in the same market, which the management believes will suffer due to the new product. Currently, the existing product generates total sales of 100,000 units each year.
ABC Co. estimates that the new product will make sales of 120,000 units each year. However, this product will also result in a decrease in sales of 30,000 from the existing product. Therefore, the cannibalization rate will be as follows.
Cannibalization Rate = 30,000 units / 120,000 units
Cannibalization Rate = 25%
It means that the new product will only generate 90,000 units (120,000 units – 30,000 units) of new sales. The remaining 30,000 will come from the replacement of the units of the existing product.
Conclusion
Market cannibalization is when a company launches a new product that affects its existing products’ sales. Cannibalization rate is the measure of a product’s market cannibalization rate. It represents the percentage of sales that a new product will replace from the existing products’ sales.
