What is Sales Cannibalization?
Sales cannibalization is when a company or a brand introduces a new product to the market and the new products gains some of its sales from the company’s (or brand’s) existing products.
As an example, McDonald’s may introduce a new Super Deluxe Cheeseburger in one of their regions. Let’s assume that the new burger sells at the rate of 1,000 per week, which is good. However, McDonald’s also loses 800 sales of their normal cheeseburger. The end result is that McDonald’s have increased sales only by a net 200 burgers overall.
As you can probably guess, what is happening here is the customer who would normally buy a cheeseburger at McDonald’s sees that there’s a new Super Deluxe Cheeseburger and they buy the new product instead – resulting in the same number of unit sales.
And that’s where the term “sales cannibalization” comes from – from cannibalizing (or eating) your existing product sales.
Another example would be a chocolate bar brand introducing a new flavor variation into their supermarket channel. The same thing will likely happen here as well – they will win sales from new or occasional customers because the product is new and exciting, but they will also win sales from their own product line.
One way to think about sales cannibalization is that the brand is effectively competing with themselves. While this sounds bad, this is normal and to be expected for most brands.
In our McDonald’s example was only an extra 200 sales on an incremental basis, the question then becomes, why introduce the new product at all? Why have the trouble, time, cost and effort of introducing a new product for minimal success?
Why Introduce a New Product that will Cannibalize your own Sales?
There are several reasons why a company would introduce a new product knowing of the potential for some, or even extensive, sales cannibalization of their other products. Let’s explore those reasons…
Sales conversation is quite common in low-involvement food categories like snack foods, fast foods, soda drinks, and most products sold in supermarkets. This is because, in these markets, variety-seeking behavior by consumers is quite common.
This means that these consumers are often after new tastes, flavors, and product designs. Let’s use Cadburys as an example. They will frequently introduce new products and flavor variations, even on a short-term basis, to target those variety-seeking consumers to win additional market share – both through increased market penetration and greater share of customer.
Another reason is because new products keep the brand fresh, exciting, and interesting. Brands that are too conservative with their product line extensions will stagnate and lose some of their “zip” and potentially be perceived as tired and even boring by consumers.
Another reason is to keep competing with yourself. While this may sound weird at first, the marketing objective is to close competitive gaps. If you can enter a market with a product variation and win an overall net increase in sales, that means there is also opportunities for competitors to do that against you. So you’re better off closing those gaps rather than leaving them open.
It can also be a way of building the product portfolio by gradually increasing the product range. Let’s think of a brand like Kellogg’s breakfast cereals. In supermarket channels they have an enormous amount of shelf space.
Their shelf space dominance gives them several advantages, such as bargaining power with supermarkets and grocery stores, plus the to win a large market share from consumers.
Therefore, by gradually increasing the number of products on offer, even though each one is only incrementally successful and is taking sales from existing products, the overall brand and their product sales will become stronger.
It’s also a good way to experiment with the market. It allows the brand to bring out a new product even if they are uncertain of its success. But as they keep all your other products in place, there’s limited downside.
The alternative, again using our McDonald’s example, is replacing the cheeseburger with the Super Deluxe cheeseburger. That could be a bit risky because we don’t know the market reaction to the new product as yet.
A better approach would be to bring out the Super Deluxe cheeseburger and run it side by side with the cheeseburger for a few months. And if it was doing better, then eventually we could withdraw the old cheeseburger product from the marketplace (if we wanted to from a portfolio management perspective).
One point we haven’t touched on is the unit versus the dollar amount. Sales cannibalization is more effective and less risky if the product that we’re introducing has a higher margin.
Again, in the McDonald’s case, let’s say their normal cheeseburger gross margin was $3, and the Super Deluxe Cheeseburger is $4, we have managed to switch consumers (upsell them) to a more profitable product. So, while we only gained extra 200 unit sales per week, it equates to an incremental increase of $1,600 per week in gross profits.
In which Product Categories is Sales Cannibalization more likely to occur?
Generally, it’s going to occur in virtually every product category.
We’ve already discussed snack foods, foods in supermarkets, fast food chains, and the like. However, it will also occur in fashion brands. As an example, if you bring out more variations of, say a t-shirt, then obviously you’re hopefully going to win new customers, but you’re also going to erode existing sales of other t-shirts.
Sales cannibalization will also happen in industries like the hotel sector. If you have one hotel in a city, and then you build a second hotel in the same or nearby city, then some of your customers will switch between the hotels.
Airlines would face the same problem. If they have five flights from city A to city B a day and they add a sixth flight, obviously, they’re going to win hopefully more customers, but some of the other flights will be impacted.
Even car manufacturers have sales cannibalization risks. If Toyota brings out another variation of a car, then they are splitting their sales across the increase product offering.
What are the Risks of Sales Cannibalization?
Firstly, you’ve got a significant time, cost, effort and risk of introducing any new product anyway. But in a worst-case scenario, Cadbury could bring out a new chocolate bar and get 1,000 sales per week. And then they lose 1,000 sales from their other product lines.
As a result, the net result is zero – no incremental sales – for a lot of work. And when you factor in the cost of the product development and launch, you will have a negative return on your marketing investment.
And even for new products that generate some net positive incremental return, we have to factor in the ongoing costs of supply, logistics, product management, and promotion. management, the marketing of it.
As we know, there’s a lot of ongoing costs and time that go into any product and usually new products need extra support and nurturing. So, we need to question: is it worthwhile us having ten flavors of soft drink rather than just nine? Is it worth that extra effort?
And then we’ve also got to think about our channel partners. Again, let’s use the Kellogg’s example. Kellogg’s gets extra shelf space from an additional product, but from a supermarket perspective, if a brand keeps introducing new products that do not generate a net increase overall in sales, it becomes an extra ordering, pricing, and stocking effort for the supermarket. What are they getting out of it?
Think about the risk here. Say we used to run 20 variations of cans of soup for our brand, and now we’re running 25 variations, but net unit sales have not increased. The risk here is damaging the supermarket relationship or whatever other channel you may be utilizing.
What do Marketers need to do?
Firstly, we need to be realistic at forecasting and considering the value of the new product. We need to factor in likely sales cannibalization levels. We simply cannot ignore them. They are likely to happen if the new product is somewhat related to existing products.
If it’s a product that is unique, then sales cannibalization will be very low. However, a similar product (which is what most new products are by number) then sales cannibalization needs to be factored into the overall profitability forecast.
We cannot just focus on the likely sales and profit of the new product. We have to offset it against what we’re going to lose. What’s the net increase to the bottom line?
We also need very clear marketing objectives. What are we trying to achieve? Typically, it is related to brand excitement, strengthening the product portfolio, gaining more shelf space, attracting variety-seeking consumers, closing competitive gaps, attacking competitive offerings.
And we’ve got to weigh up the strategy against the financials together. In some cases, the strategy will outweigh the numbers. And what I mean by that is that if we were looking to close a competitive gap, then that move has a significant strategic value and would be more important in the decision than the financial outcome.
Think about that it’s almost like insurance that we’re covering ourselves against competitive risks.
Likewise, if our marketing objective is to keep energizing the brand, then accepting sales cannibalization risks makes sense.
When we’re clear on the objectives and we’ve done the financials correctly, then we have a very compelling case to put forward about whether to launch the product or not.
How do we Minimize the Risks of Sales Cannibalization?
Firstly, we need to ensure that the product has enough points of differentiation to be seen as different and unique. And in that way, there’s a good chance that we’ll attract additional sales.
For example, let’s consider a cookie brand with three flavors of chocolate chip cookies that brings out a fourth flavor variation that is quite unique in the market and a big change from their normal flavors. Hopefully our existing customers get their normal cookie product and then buy the new one to trial as well, and ideally the new flavor also attracts new customers. This leads to a big increase in sales with limited sales cannibalization.
But a new flavor variation that is similar to our existing ones is unlikely to attract a lot of excitement or new customers and is likely to lead to high levels of sales cannibalization.
This then becomes one of the best ways to minimize self-cannibalization by ensuring that the new products you bring out are NOT just simple variations of existing products.
A better move could be a brand extension or moving into a new product category. For example, Kellogg’s have moved from normal cereal into breakfast bars and even into drinkable variations of their products. That approach attracts new consumers to the brand, rather than just switching sales between existing offerings.
Another risk is poor channel management. As highlighted above, our retail partners may not always be excited about another product that does not contribute much to incremental sales.
Hopefully have good partners and relationships in the channels, but we need to be on the same page. We need good communication and even joint planning. They are likely to be happy that we are keeping the brand excited and energized, but we don’t want to overdo with a series of low performing new products that mostly switch sales between our own product lines.
As touched on with the financials above, it is important that we are realistic with the overall increase in sales and the likely return on marketing investment.
This is perhaps more of an internal risk. As a product manager in a company, you promise X result because you’re only looking at the new product but then fail to consider the offset of sales to other products. If this happens then senior management would not be happy because you have not provided them the correct forecast information – so, that becomes somewhat of a career risk.
Key points to Take Away
- Sales cannibalization is normal and to be expected.
- It needs to be factored into forecasts and assessments of whether the new product is viable.
- We need to have enough differentiation in the product to try and minimise sales cannibalization.
- We need to be very clear about the strategy of why we’re bringing this product to market, which may offset any financial concerns.
- Ideally, we need to strengthen the brand overall and make it more competitively robust.
