Market Cannibalization – Definition, How Does It Work, Example, And More
Market cannibalization is one of the worst things that a business can face with its products and services. It mostly happens when a company comes in with a new product for the market, and because of this, the demand for its original product starts to decline. This leads to the business experiencing losses not only in sales but also in revenue and market share. Hence, due to this fear, many companies hesitate to develop new products.
In this article, you will also learn about market cannibalization, how it works for businesses, and the ways in which it affects a business’s market as well as its product line. We will take a look at the phenomenon with the help of a simple example. Finally, we will provide you with tried-and-tested steps to prevent market cannibalization in business. Hence, to learn more, read on through to the end of the article.
What Is Market Cannibalization?
According to Investopedia,
“Market cannibalization is a loss in sales caused by a company’s introduction of a new product that displaces one of its own older products. The cannibalization of existing products leads to no increase in the company’s market share despite sales growth for the new product.”
It works in most cases where the earlier product, as well as the new product of the business, share a common base of customers. It can also happen when a fast food outlet or chain store loses its customers after a store of the same brand starts operating nearby.
It also happens when the new product is almost the same as the product that is already existing. Both these products have the same target audience. However, the introduction of the new product in the market puts the existing products of the business out of the market. This, in turn, affects the business a lot, as the business faces stagnant growth in the market despite an increase in sales of the new product it launched.
Despite enticing new customers with the new products, the phenomenon results in attracting the already existing customers towards the new product as well. As an outcome, the sales and growth of the company get a major hit.
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How Does Market Cannibalization Work?
According to Indeed.com,
“Even with a detailed marketing plan, cannibalization may occur depending on how the general customer base reacts to the new product. Whether or not the products are competitive, customers may prefer the new one. A common reason why this happens is that two products may be too similar.”
Let’s say a technology company sells smartphones. And they introduce a new one which is similar to the old one. The customers that were attracted to the old one now start liking the new one and purchase it. Hence, the new product was sold at the cost of the sales of the old one.
Therefore, although the new product got major sales, the sales of the old product were affected. Hence, there is no increase in sales of the company. In fact, considering a new product was launched, the sales actually got affected.
In various marketing campaigns, companies unintentionally, however, discourage their existing customers from using previous products. The tone of the marketing here suggests that the product has become obsolete as compared to the new one.
Example Of Market Cannibalization
Corporate Finance Institute gives a simple explanation of market cannibalization –
“There are certain situations where market cannibalization cannot be avoided. For example, we now see tons of department stores that operate as online businesses as well. The store owners already understand the risk that its online sales can jeopardize those of its brick-and-mortar stores.”
Let’s take an example of a well-known company – Apple Inc. When Apple releases a new iPhone with new features, it never shies away from explaining why the product is better than before. Furthermore, the company also ensures that the new iPhone reaches all Apple stores throughout the world.
Hence, many people are attracted to the new one since they know that the latest one is better than the previous one, despite it being more expensive. As a result, the sales of the older iPhones start dropping.
However, Apple makes up for this loss amazingly. It increases the price of the new one and also captures the current customers of its competitors. This helps in increasing Apple’s customer base.
How To Prevent Market Cannibalization? – Steps To Follow
The following are some of the major steps that you will need to take if you want to prevent market cannibalization in your company:
1. Determine Your Market Goals
Before launching a product, have a clear idea of what are your goals with that. What do you want to achieve – customer loyalty? eliminate competition? filling a market-gap? – Find out through research.
2. Analyze Your Market
Never ever launch a product without properly understanding your customers’ behavior and market dynamics. Always research the performance of your existing products and how much do customers like them.
3. Test Your Customers Before Extending The Product
Find out your potential customers, and test the product beforehand. Ask for genuine feedback from the customers. You can do so by surveys, interviews, experiments, etc. Validate your assumptions based on results.
4. Monitor The Product’s Performance
Monitor the performance of the product after its initial launch. You can use various metrics like – customer satisfaction, market share, profit, sales, etc., to evaluate the product’s extension.
5. Focus On Innovation
Constant innovation and differentiation are required for your products if you want to avoid cannibalization. Keeping up with the needs and demands of customers might help.
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Summing Up
Hope this article was helpful for you in understanding the phenomenon of market cannibalization and how it affects businesses. In many cases, companies use it as a deliberate strategy to blow out competition, while sometimes, it results in the failure of the company itself to reach its target market.
To stop market cannibalization from happening, consider following the aforementioned steps in the previous section. What is your opinion on market cannibalization, and do you have any recommendations to stop the same? Share your insights on the matter with us in the comments section below.
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Forcing Consideration The aggressiveness of the offer can sometimes create pressure on the target company's management and board to seriously consider the proposal, even if they are initially against the idea of a merger or acquisition. 4. Negotiation If the bear hug offer is taken seriously, negotiations between the two companies commence. The terms of the acquisition or merger, including price, management structure, and other conditions, are discussed and refined during this stage. 5. Outcome Depending on the negotiations, the target company might accept the offer, reject it, or negotiate for a higher price or better terms. Sometimes, even a rejected bear hug can lead to future negotiations or a change in the target company's strategy. Bear hugs in the business world can be controversial because they can put significant pressure on the target company and its shareholders, often leading to heated debates and intense negotiations. 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