Cannibalization is a term used in product management to describe the scenario where a new product or product line takes sales away from an existing product or product line. This can occur when the new product is similar to the existing product or when the new product is positioned as an upgrade to the existing product.
For product managers, understanding the potential for cannibalization is important as it can impact the overall success of a product launch. If the new product takes away too much sales from existing products, it can negatively impact the overall revenue and profitability of the company.
Contents
This series of posts focuses on the crucial concepts of product management, including product strategy, roadmap creation, market analysis, and UX design. The goal is to give a comprehensive overview of the key principles and practices all product managers should understand.
🔍 If you want to read the concise version of this post then just read the text written in bold.
- SMART Goals: Specific, Measurable, Achievable, Relevant, and Time-bound Goals in Product Management
Goal setting is a crucial part of any business strategy, especially in the realm of product management. One popular technique for setting effective, clear, and achievable goals is the SMART framework. It encourages precise and realistic goal setting, thereby increasing the chances of success. - The Eisenhower Matrix: Ranking Topics by Urgency and Importance
The Eisenhower Matrix is a powerful tool designed to help prioritize tasks based on their urgency and importance. This framework, visually represented as a 2×2 grid, allows us to understand which tasks require immediate attention, which ones can be scheduled for a later time, which tasks can be delegated to others, and finally, which ones should be discarded altogether.
Understanding Product Cannibalization
The first thing to do to understand cannibalization is to understand what it means and when it can occur.
Product cannibalization occurs when a company’s new product takes away sales from its existing product. This phenomenon can lead to a decrease in the overall market share if not managed effectively. It’s important to understand and plan for this, as it could be part of a strategic decision or an unforeseen consequence of a new product introduction.
There are typically two cannibalization scenarios: the unntentional scenario and the intentional scenario.
Unintentional Cannibalization
This situation arises when a company introduces a new product, not anticipating its impact on existing offerings. For example, a cosmetic company launches a new, more affordable skincare line. However, they didn’t realize this line would significantly decrease the sales of their existing, pricier products because customers prefer the cheaper option.
Intentional Cannibalization
In this scenario, a company purposefully releases a new product, fully aware it will affect the sales of their current products. Yet, they proceed because their ultimate goal is to expand their overall market share or impede competitors. An example here would be Apple’s introduction of the iPad Mini. Despite knowing it could potentially cut into the sales of the original iPad, Apple strategically launched the iPad Mini to block competitors from gaining traction in the smaller tablet market segment.
| Unintentional Cannibalization | Intentional Cannibalization | |
|---|---|---|
| Awareness of Cannibalization | Low | High |
| Strategy behind | No intentional strategy | Part of strategic planning |
| Impact on sales | Negative | Can be positive or negative |
| Control over cannibalization | Low | High |
Examples from the real world: Apple and Netflix
One classic example of product cannibalization is Apple’s iPhone. When Apple introduced the iPhone, it led to a significant decrease in the sales of the iPod. However, this was part of Apple’s strategic decision. They understood that the market was moving towards all-in-one devices, and by introducing the iPhone, they managed to stay ahead of the competition, despite cannibalizing their own product.
Another example is Netflix’s transition from DVD rentals to online streaming. This decision led to a massive decrease in their DVD rental business, but it was a strategic move to stay ahead of the curve and dominate the online streaming market.
How to deal with Cannibalization
Let’s take a deeper look into what a product manager can do to deal with product cannibalization.
Understanding Your Customers
In the context of launching a new product, understanding your customers is a vital step. By comprehensively studying your customer base, you can anticipate how your new product might affect the sales of existing products.
Example: if a tech company is considering introducing a new smartphone model, market research can shed light on whether customers would switch from their current model to the new one, potentially leading to cannibalization.
Distinguishing Your Products
Product differentiation plays a key role in preventing cannibalization. By ensuring each product has unique features, benefits, and branding, you can avoid them competing with each other.
Example: a car manufacturer, for example, can launch an electric vehicle line with distinct features and branding, clearly separating it from their existing petrol cars.
Product Positioning
Positioning your new product strategically in a different market segment or as a complement to existing products can minimize cannibalization.
Example: for instance, a food company can introduce a line of gluten-free products targeted at health-conscious consumers, rather than making it a direct competitor to their existing non-gluten-free range.
Applying Strategic Pricing
Leveraging pricing strategies can also help to avoid cannibalization. By setting different price points for your new and existing products, each can attract its unique customer base.
Example: a clothing retailer might introduce a luxury line at higher price points, distinguishing it from their existing affordable line.
Refining Your Marketing Strategies
Adjusting your marketing strategies can help promote each product to its respective customer base, minimizing the risk of cannibalization.
Example: for instance, a skincare company could run targeted advertising and promotional campaigns emphasizing the unique benefits of both their anti-aging and their moisturizing ranges, catering to different customer needs.
Keeping Track of Your Sales Data
By consistently monitoring your sales data, you can identify the potential impact of new products on existing ones and make necessary adjustments.
Example: suppose an electronics company notices their new line of smart TVs is leading to decreased sales of their older models, they may need to reassess their product strategy.
Offering Upgrades to Customers
Sometimes, new products can be positioned as upgrades or enhancements to existing ones. This can boost overall sales and the company’s market share.
Example: a software company, for example, could introduce a new version of their software with advanced features, appealing to customers looking to upgrade.
Embracing Cannibalization
Occasionally, cannibalization can be beneficial. By acknowledging and strategically using it, companies can boost their overall sales and market share.
Example: the classic example here is Apple, who introduced the iPhone knowing it would cannibalize iPod sales, but increased their overall market share in the process.
Key Takeaways
| Key Takeaways | Description |
|---|---|
| Understanding Cannibalization | Product cannibalization occurs when a company’s new product eats into the sales of one of its existing products. It’s a critical issue to consider in product strategy and portfolio management. |
| Cannibalization Risks | Cannibalization can reduce overall profitability if the new product has a lower profit margin or if it fails to attract enough new customers to compensate for lost sales of the existing product. |
| Managing Cannibalization | Steps to manage cannibalization include market segmentation, strategic pricing, and product differentiation. It’s crucial to monitor sales closely after launching a new product. |
| Embracing Cannibalization | In some cases, cannibalization may be part of a deliberate strategy, for instance, when a company introduces a lower-priced product to prevent competitors from doing the same and taking market share. |
In conclusion, cannibalization is a common challenge faced by product managers in the business world. It occurs when a new product or product line takes sales away from an existing product or product line. To minimize the risk of cannibalization, product managers can conduct market research, differentiate products, implement strategic pricing and marketing strategies, monitor sales data, offer upgrades, and embrace cannibalization as a positive outcome in certain situations. By following these strategies, product managers can ensure the success of their product launches and increase the overall market share of their company.
Understanding the concept of cannibalization and being proactive in addressing it can help product managers achieve their goals and drive success for their organization.