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Market Cannibalization



Definition

Market cannibalization refers to the phenomenon where a company’s new product offerings negatively affect the sales and market share of its existing products. This occurs when the new product attracts a significant portion of the customer base that would have purchased the original product, causing a reduction in overall sales. Market cannibalization can lead to reduced profits, lowered brand value, and negative customer perception if not managed carefully.

Phonetic

The phonetics of the keyword “Market Cannibalization” are: /ˈmɑːrkɪt ˌkænɪbəlaɪˈzeɪʃən/

Key Takeaways

  1. Market Cannibalization occurs when a company’s new product or service negatively impacts the sales of their existing products or services, potentially reducing overall revenues and market share.
  2. Although Market Cannibalization can have short-term negative effects, it can sometimes be beneficial in the long run by helping companies innovate, stay competitive, and cater to evolving consumer preferences.
  3. To manage Market Cannibalization, companies should carefully assess the potential effects of introducing a new product or service and consider strategies like targeted marketing, product differentiation, or phasing out outdated products to minimize cannibalization risks.

Importance

Market cannibalization is an important concept in business and finance as it refers to a situation where a company’s new product or service starts eating into the sales and revenue of its existing offerings. This phenomenon may lead to reduced market shares, profit margins, and overall weaker financial performance for the business. It becomes crucial for organizations to identify potential cannibalization risks before launching a new product or service to prevent unintended adverse effects on their current operations. By analyzing the market and carefully strategizing their product offerings, businesses can avoid excessive resource allocation to products that could ultimately diminish their revenues, and instead focus on diversification and maintaining a balanced product portfolio.

Explanation

Market cannibalization is a strategic approach taken by businesses to increase overall market share and reinforce their competitive advantage in a specific market segment. Oftentimes, this involves launching a new product or service that, while similar to an existing offering, targets a slightly different market segment or appeals to a broader customer base. The primary purpose of this strategy is to capture a greater share of consumer demand and outpace competitors by creating variations and diversification in the company’s offerings. However, market cannibalization can have unintended consequences, as the introduction of new offerings may lead to a decrease in sales of existing products or services. This phenomenon occurs when current customers opt for the new offering instead of continuing to purchase the original product, thereby diminishing the overall profitability of the product line. As a result, companies must assess the potential negative impact of market cannibalization and devise methods to mitigate its effects, such as strategically pricing and differentiating the new offering to minimize self-inflicted competition. Despite the potential downsides, market cannibalization serves a critical purpose in maintaining and expanding a company’s foothold in the dynamic business environment.

Examples

Market cannibalization refers to a situation where a company’s new product or service eats into the sales of its existing products or services, resulting in decreased overall revenue. Here are three real-world examples: 1. Apple Inc.: The introduction of the iPhone in 2007 led to the cannibalization of Apple’s iPod sales as iPhone performed all the functions of an iPod and more. As people moved to smartphones, global demand for standalone portable music players like the iPod went down and eventually, sales and popularity decreased significantly. 2. McDonald’s: In the early 2000s, McDonald’s introduced a new range of premium salads to diversify its menu and cater to health-conscious customers. While the idea was to attract new customer segments, it led to market cannibalization as some customers who previously purchased burgers or sandwiches shifted to salads, reducing overall revenue from the core offerings of McDonald’s. 3. Coca-Cola: In an effort to capture a share of the diet soda market and appeal to health-conscious consumers, Coca-Cola launched Diet Coke in the 1980s. At first, it successfully stole some market share from rival Pepsi’s diet offering but also led to the cannibalization of its own flagship product, Coca-Cola Classic. Consumers who previously drank regular Coca-Cola switched to the new diet option, reducing overall sales of Coca-Cola Classic.

Frequently Asked Questions(FAQ)

What is Market Cannibalization?
Market Cannibalization refers to the process by which a new product or service introduced by a company takes away the market share, sales, or customer base of its existing products or services. This can lead to reduced profits, and may indicate a need for better product differentiation, targeting, or pricing strategy.
What are the common causes of Market Cannibalization?
Market Cannibalization can occur due to various reasons such as launching similar products in the same market, targeting the same customer segment, aggressive promotional activities for a new product without considering the existing offerings, or neglecting the pricing strategy resulting in price competition among company’s own products.
How can Market Cannibalization affect a company’s overall performance?
Market Cannibalization can have both positive and negative effects on a company’s performance. On one hand, it may indicate strong brand presence in a market leading to a dominant position. On the other hand, it can result in reduced profitability, decline in sales, and customer confusion, ultimately affecting the brand image and overall performance.
How can companies prevent Market Cannibalization?
Companies can prevent Market Cannibalization by conducting thorough market research before introducing a new product, differentiating products through unique features, positioning, or pricing, targeting different customer segments, managing promotional activities and channel strategies efficiently, and by considering the potential impact of cannibalization in their overall strategic planning.
Can Market Cannibalization ever be a good thing for a company?
In some cases, Market Cannibalization can be beneficial for a company. For example, it can help a company to phase out an older product and replace it with a new and improved offering addressing customer needs. Furthermore, it can help companies to maintain a dominant position in the market by eliminating competition or by securing greater market share by introducing a variety of products catering to different customer segments.

Related Finance Terms

  • Product Cannibalization
  • Brand Dilution
  • Market Saturation
  • New Product Introduction (NPI)
  • Competitive Displacement

Sources for More Information


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