Understanding Market Cannibalization and How It Works?

Market Cannibalization refers to the loss in sales or reduction in market share of a product, occurred due to the same company’s introduction of a new product line that wipes out the existing market for its own current products.

Instead of appealing to a new segment of the market, the product line appeals to the company’s existing customer base leading to a reduction in the sales volume and demand of its established products. This implies that market cannibalization is a case where two product lines of the same brand compete against each other.

Let’s understand this more clearly with an example. For instance, a company ABC is famous for its desktop computers. Now they decide to introduce a new line of laptops with the aim of attracting a considerable segment of the market. Now soon, ABC notices that regardless of the great launch and successful increase in the sales volume of its latest laptops, the sales volume of its desktop computers has taken a crash-dive simultaneously. This drove out of ABC’s desktop computer sales by its laptop sales accounts for Market Cannibalization.

How Does Market Cannibalization Works?

Also known as corporate cannibalism, it occurs when a new product line interferes with an old product line’s existing market. Instead of attracting a new audience, it appeals to its current customer base. While the company has failed to increase its market share, it has definitely increased its cost of production.

Market Cannibalization typically takes place unintentionally when an advertising campaign for the new product line drives the consumers away from an old product. But this can cause some severe damage to the company’s profits.

But, at times, market cannibalization can also be an intentional and calculated strategy for a company’s growth. For instance, a food outlet chain can open a new outlet near one of its own old outlets. They know that they will eventually cannibalize each other’s sales but the new store will also end up stealing market share from other local competitors, ultimately driving them away from the business.

However, using market cannibalization as a business strategy is usually condemned by investors and stock analysts. They consider it as a potential drawing of short-term gains. They advise businesses to avoid cannibalization while planning marketing and business strategy. Moreover, companies should monitor product sales individually to determine if market cannibalization is occurring.

Examples of Market Cannibalization

Many big companies have been ignoring the risk of market cannibalization while chasing more significant objectives. One such example is Apple.

Whenever Apple launches a new iPhone model, the sales of its older iPhone model takes a nosedive instantly. But Apple depends on its latest phone model to capture the existing customers from its competitors’. That is why it ends up boosting its overall market share.

Many brands risk market cannibalization, often hoping to gain a significant increase in its total market share. For example, a brand that makes sunscreen lotions may introduce a new sunscreen with higher SPF than its old product. They are aware that this will lead to a decline in some of its product sales, but it is looking forward to expanding its overall market share by appealing to health-conscious customers who would instead switch brands than compromise with their skin health.

Why Does Market Cannibalization Matters?

Market Cannibalization can cost a business a tremendous amount of money if they do not conduct brief research before releasing a new product line. If they release a new product too soon replacing the brand’s existing old product, or if the new product is too similar to the old product the company had released, it may result in ending up the existing product’s sales life too soon causing a massive loss to the company’s total sales.

So, this was all about market cannibalization, how it works, and how it affects a company positively and negatively both. You know what is best for your business growth. Implementing a well-researched and calculated cannibalization strategy can bring you huge profits. Likewise, poor execution or lack of research might end up hurting your overall market share.

We hope this information helps you. Let us know how the market cannibalization works out for you or has worked out for you in case you have tried your hands on it already.