Sometimes a new product becomes a big hit, yet the company's total sales do not grow as much as expected. If it turns out that many of the customers who bought the new product were people who had been using another of the company's products, then the company did not take over someone else's market; it simply moved its own market from one place to another.
The phenomenon in which a new product or service launched by a company eats into sales of the same company's existing products is called ‘cannibalization,’ and in Korean it is also called ‘self-market encroachment.’
In this article, we will look in turn at what cannibalization is, why it happens, how real companies have experienced and made use of it, and what to consider when dealing with it.
Understanding Cannibalization
A Market That Eats Itself
Cannibalization comes from an English word meaning ‘to eat one's own kind.’ It refers to a situation in which a company's own products, rather than a rival's, compete for the same customers, so that sales of one reduce sales of the other.
For example, suppose a beverage company launches a zero-calorie cola alongside its existing cola. Even if the new product sells well, if much of that comes from customers who used to drink regular cola switching over, total sales barely grow and revenue merely changes places.
So companies look not only at a new product's sales volume but also at whether those sales came from new customers or moved over from existing products. The higher the share that moved over, the greater the cannibalization is considered to be.
This phenomenon is not limited to manufacturing. When a bank builds up its mobile app, fewer customers visit branch counters, and when a publisher releases e-books, some print book sales decline; these work on the same principle. The concept can be applied to any case in which customers move from one channel to another within the same company.
Why Do Companies Cannibalize Their Own Markets?
Cannibalization usually occurs when products overlap a great deal. The main causes are as follows.
(1) Similar customer bases
If a new product and an existing product target the same people, customers will choose only one of the two.
(2) Similar uses
If products meet the same need, buying one reduces the reason to buy the other.
(3) Close prices and sales channels
If prices are similar and the products are sold side by side in the same store or the same app, customers switch easily.
The same thing happens when expanding stores. If a brand opens a new location right next to an existing one, many of the new store's customers may be people who used to go to the existing one.
Entry-level products can have a similar result. Releasing a cheaper entry-level model can pull customers who would have bought the pricier premium model down to the entry-level one, so unit sales rise while profits may actually fall.
Companies That Experienced Cannibalization
Apple is often cited as a company that accepted cannibalization. At a time when the iPod was enjoying great success, it launched the iPhone with music playback, after which iPod sales declined. But for the company as a whole, it gained a far bigger market.
Kodak, by contrast, is judged to have been slow to go digital: although one of its researchers built a prototype digital camera in 1975, there were worries it could hurt the film business. In the end other companies took over the digital camera market, and Kodak filed for bankruptcy protection in 2012.
The difference between the two companies lay in whether they tried to avoid cannibalization or accepted it and moved ahead. It shows that even facing the same risk, a company's fate can differ greatly depending on the choice it makes.
Netflix, too, put its weight behind streaming while its DVD-by-mail rental business was doing well. It was a choice to shrink its own existing business, but by riding the shift in the market early, it was able to become what it is today.
Points to Know When Dealing With Cannibalization
Cannibalization is not necessarily bad. If you do not cannibalize your own market, a competitor may do it for you. In times of market change, trying to protect existing revenue can mean missing a bigger opportunity.
So before launching a new product, companies decide in advance how far its customer base, price, and sales channels will differ from those of existing products. They also look at the share of new customers and the changes in overall revenue and profit to judge whether the cannibalization is at an acceptable level.
Making clear distinctions between products is also a good approach. If size, features, and price ranges are divided so that customers can choose the product that suits them, the products fill their own places rather than taking from each other. This is also why car companies release models in classes, from compact to full-size cars.
What matters is not the performance of a single product but the growth of the company as a whole. If existing and new products are designed to play different roles, cannibalization can be reduced while the overall market expands.
In the end, cannibalization is less a mistake to be avoided than a cost to be calculated and managed in advance. Once you have weighed how much you will lose and how much you will gain, cannibalizing your own market can be a perfectly wise strategy.
Cannibalization is a corporate dilemma in which new success eats into existing success. Knowing this concept lets you read, behind news of a product launch or store expansion, the movement of customers hidden behind the sales figures.
Finding the balance between what to protect and what to change: that is the first step in management that survives for the long run in a changing market.
