Cannibalization is when a customer trades between similar products. This can be driven by many factors like the introduction of a new product, promotional incentivization, better product placement, etc.
For example, a new yogurt flavor is introduced, and the store notices record sales for this particular product. The grocer now needs to figure out if the new flavor is bringing in new customers or if it is simply eating away the sale of other existing flavors of yogurt.
There are a lot of cannibalization types in retail, here are the most common ones:
This cannibalization type occurs when a retailer introduces a new product that competes with an existing product. This effect can happen when a retailer introduces a version of an existing product at a lower price, luring price-sensitive customers into buying the cheaper option and reducing the sales of the original one. It’s like when a smartphone provider introduces a mid-range phone that cannibalizes sales of the flagship ones. Additionally, introducing a product with similar features to an existing one can cannibalize its sales, as consumers will opt for the newer option that has very similar features to the existing product.
When a retailer opens a new brick-and-mortar store near an existing store, it can redirect the customers of the older store toward the new location. Although it might be an indication of a growing franchise, cannibalization is inevitable, especially when your targeted audience falls into your old store’s bucket. Despite continuous innovation and the introduction of new products, retailers must identify cannibalization-prone stores and locations carefully before executing any expansion plans.
Imagine launching an online store that offers flexible delivery options and multiple advantages in a way that encourages your existing customers to make their purchases online. Such a thing would take away sales from your physical stores, as you already have introduced a new sales channel that competes with your existing ones.
Reduced Overall Sales:
Cannibalization reduces your sales by splitting your customer base, as a newly launched product that targets the same customer segment as an existing one creates competition for a limited number of buyers. Customers might now go for the new product, leading to a net loss in sales, as the old product is now overshadowed by its newest counterpart.
Profit Margin Decline:
When launching a new product, sometimes you need to lower its price to compete with an existing one within the same category, leading to price wars. For example, if you’re selling a high-end keyboard for 200$ with a 20% margin and introduce a budget-friendly keyboard at 50$ with a 10%margin, the latter may cause cannibalization by stealing sales from the expensive ones, and your total profit per customer will potentially drop significantly even if you sell more cheap keyboards.
Confused Customers:
Cannibalization is often caused by similar offerings made by retailers as a part of chaotic promotion planning and item pricing, offering similar deals for products from the same categories. As a result, customers find it difficult to understand the key differences between these products and which one aligns with their needs, creating an overwhelming factor that sometimes leads to aborting their purchasing mission. Inconsistent or unclear messaging across multiple channels might also leave your customers unsure of where to find the best value for their money.
Resource Dilution:
Allocating resources to promote a new product launch or open a new location can stretch your existing resources too thin. If the new resources are pulled directly away from existing products or locations, it can reduce their marketing effectiveness and eventually reduce sales. Such an effect can also lead to production and inventory management issues, as managing inventory for multiple similar offerings can become complex and often lead to overstocking or understocking.
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