How to Calculate Cannibalization?

In business, cannibalization is when one product or service takes sales away from another product or service within the same company.

While it may seem counterintuitive, cannibalization can be good if it’s done strategically.

With proper planning, companies can use cannibalization to their advantage, growing their overall sales while protecting individual products and services from the competition.

But how do you calculate cannibalization? Keep reading to find out.

Definition:

Cannibalization is a term used in marketing and economics to describe the competition between products or services from the same company.

When one product or service cannibalizes another, it removes sales from a similar offering. It can happen when a company introduces new products with features beyond the capabilities of existing alternatives, making them obsolete.

Cannibalization can also occur when a company offers lower-cost options, and customers purchase these cheaper options instead of the more expensive ones.

In both cases, one product or service negatively impacts the sales of another belonging to the same company.

As such, companies often try to avoid this dynamic by analyzing customer patterns to identify which product or service offerings complement each other rather than compete against each other.

Understand the different types of cannibalization

Cannibalization is an oft-used term, but it is important to understand the different types of cannibalization to use it effectively.

Direct cannibalization occurs when a new product or service competes with an existing offering from the same company and decreases its demand.

 Indirect cannibalization happens when a new product from one division of a company creates additional sales that were previously possible for another division’s offering.

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Lastly, Revenue cannibalization occurs when a new product or service displaces general brand loyalty, which results in dropping revenue for the company as a whole.

With so many ways companies can be impacted by cannibalization, it is important to do your due diligence before introducing any new offerings.

Calculate the sales lost to cannibalization

Calculating the sales lost to cannibalization is an important task for any business. Firms have often launched new products that overlap in features or target the same consumer segment as existing products.

This can lead to the new product stealing demand away from the existing one, causing a decrease in sales numbers and profits.

To adequately determine how much sales have been lost from cannibalization, you need to compare the sales performance of your current product against historical trends if similar products were not released during the same period.

Doing this will give you an accurate estimate of how much has been lost due to cannibalization, allowing you to make adjustments as needed to counteract any additional losses.

Use cannibalization analysis to make strategic decisions

Cannibalization analysis is a powerful tool in the arsenal of any strategist or marketer. It can provide valuable insights into how one product negatively affects the sales of another.

By employing cannibalization analysis, companies can make decisions based on data that will help maximize their profits and identify opportunities to refine their product offerings, while mitigating risk.

For example, understanding how a newly released product is impacting the sales of existing products, or which promotions will negatively affect future sales.

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Ultimately, clever strategic decisions made with the help of cannibalization analysis mean companies can be far better placed to execute successful marketing campaigns that keep their customers happy and increase business performance.

Cannibalize your products or services

Cannibalizing one’s products or services can be a useful strategy to increase revenue, by utilizing existing interfaces and technologies.

It is important to identify where an organization can benefit most from cannibalizing its products and when it is time to build new services completely.

For example, a company might find that updating existing features or bundling different items together are the best ways to increase sales. When done properly, cannibalization allows companies to stay competitive while leveraging assets.

Therefore, cannibalizing your products and services can be advantageous if planned out carefully and managed on an ongoing basis.

Avoid product or service cannibalization.

When launching a new product or service, it is important to ensure that it does not cannibalize existing offerings in your organization.

Cannibalization occurs when a new offering causes the public to shift from buying one of your existing products or services to the new offering, thus decreasing overall revenue.

To prevent this, it is best to consider the price points between current and new offerings and their functionality.

For example, if you own a clothing store, launching a secondary line of higher-end clothing may be beneficial so long as there is enough distinction between it and clothing offered by other brands. Taking preemptive steps toward preventing cannibalization can be critical for maintaining profitability long-term.