Product cannibalization is a term that gets tossed around a lot in the business world, but what does it really mean, and how should companies think about it?
At its core, product cannibalization occurs when a new product introduced by a company eats into the sales of one of its existing products, often from the same brand. While it might seem like a negative outcome, it’s not always bad.
In fact, it can be a strategic move, depending on how it’s handled.
Understanding Product Cannibalization
In simple terms, product cannibalization happens when a company’s new product takes market share away from its existing products, instead of attracting new customers. For example, when Apple releases a new iPhone model, older models may see a drop in sales, even though those older models are still in the product lineup.
The key challenge here is that the company is often trading off one product’s sales for another—both coming from the same brand. This can affect profits, as the newer product may have a lower profit margin, or the older product may be priced too aggressively to maintain profitability.
The Pros: Why Cannibalization Can Be Strategic?
- Innovation Over Stagnation In fast-moving industries, especially in technology, innovation is crucial to staying competitive. If a company doesn’t continuously push the envelope with new products, its competitors will. In this context, product cannibalization is often a sign of progress. Think of it as a necessary evil—by introducing new products, a company may alienate some existing products, but it also sets the stage for long-term growth and relevance.
- Sustainability of Market Leadership Companies that lead in innovation often cannibalize their older models intentionally. For instance, when Apple introduces a new iPhone, the previous models often become more affordable, attracting a different segment of the market. This dynamic ensures that Apple remains dominant across a wider range of price points and avoids losing out to competitors. Cannibalization can, therefore, help a brand capture a larger share of the market.
- Higher Margins in the Long Run While the initial hit to sales of older products may be noticeable, a newer product that commands a higher price point or premium features can end up being more profitable in the long run. This is particularly true if the product addresses an unmet need in the market or brings something new that allows the company to create new revenue streams.
The Cons: The Risks of Cannibalization
- Erosion of Profits The most obvious risk is the loss of revenue from an existing product. If a new product cannibalizes an old one without adding significantly higher value (in terms of pricing, features, or positioning), the company may see an overall decline in profits. This can be especially damaging if the older product is a major profit driver or has a strong loyal customer base.
- Confusing Consumers Sometimes, the overlap between products can confuse customers. If two similar products exist in a brand’s portfolio, consumers may be uncertain about which to buy, leading to a decision-making paralysis. Worse, customers may feel that the new product makes the older version obsolete, even if that’s not the case, potentially harming the brand’s reputation.
- Impact on Brand Loyalty Brand loyalty is a crucial part of a company’s success, especially in consumer-driven industries. When a new product cannibalizes an old one, customers who previously trusted a certain model or product could feel neglected or betrayed by the company. If a loyal customer feels that their previous purchase is no longer viable or supported, they may seek alternatives elsewhere.
Balancing the Act: When Product Cannibalization Works?
So, when is product cannibalization a good idea?
It tends to work best when the company has a clear understanding of the lifecycle of its products and is looking to maintain its competitive edge rather than simply make incremental gains. For instance, tech companies that release new iterations of smartphones, laptops, and other devices often do so with an eye on driving future growth, not just sustaining current profits. These companies understand that their market share is best maintained through continuous innovation and strategic cannibalization.
However, businesses should avoid letting cannibalization happen accidentally. To make it work, companies need to:
- Segment Products Carefully: Ensure each product in your lineup serves a unique customer need or market segment.
- Analyze Profit Margins: Make sure the new product will generate enough profit to offset any losses from the old one.
- Communicate with Customers: Be transparent about product changes and why they’re happening, so customers aren’t confused or alienated by the shifts.
Examples of Product Cannibalization Done Right
- Apple’s iPhone and iPad Lines Apple has masterfully used product cannibalization to maintain its dominance. When they launch new models of the iPhone, they intentionally lower the price of previous models, cannibalizing their own sales but widening their market reach. It’s a delicate balancing act, but it keeps Apple at the top of its game.
- Coca-Cola’s Product Strategy Coca-Cola is another prime example. They’ve introduced multiple variations of their flagship soda (Diet Coke, Coke Zero, and more) over the years, cannibalizing their own sales to meet the evolving tastes of consumers. In doing so, they’ve maintained their market share despite changing preferences.
- Nintendo’s Consoles Nintendo’s release of new gaming consoles, such as the Nintendo Switch, inevitably leads to older models like the Wii U or 3DS losing steam in terms of sales. But by introducing innovations with each new console, Nintendo keeps its gaming audience loyal while also capturing new customers with every generation.
The Smart Approach to Product Cannibalization
Ultimately, product cannibalization can be a double-edged sword—if executed well, it can fuel a brand’s growth, create innovation, and maintain leadership in a competitive market. However, if mishandled, it can erode profits, confuse customers, and damage brand loyalty.
The key lies in strategy. Brands must carefully analyze their product portfolio, understand their market, and design their product launches in a way that maximizes future growth while minimizing the risk of hurting existing revenue streams.
Cannibalization isn’t something to fear—it’s a sign of growth and the willingness to stay ahead of the curve. Like all things in business, it’s about finding the right balance.
