Why Should Retailers Care about Product Cannibalization?
Product cannibalization is often portrayed in a negative context within the retail environment – and for good reason.
In most cases, it results in lost sales, decreased revenue and even retail business closures.
What makes it unique is that even with all of these negative connotations, there have been cases where retail businesses have strategically used product cannibalization to their benefit.
So what exactly is product cannibalization, how can it be avoided and how could retailers use it to their advantage?
This article will answer those questions while also providing real-world examples and solutions retailers can use to control product cannibalization.
What is product cannibalization?
In the retail environment, product cannibalization can be referred to as a loss of sales and revenue when a newly introduced product pulls demand away from existing products within the same portfolio.
This creates internal competition between products instead of pulling customers, revenue and market share from the retail businesses’ external competitors.
Typically unexpected, this situation can be extremely detrimental for retailers and also has the potential to create additional issues such as:
- Inventory Imbalances
- Overstocks
- Markdowns
Fortunately, there are certain triggers that can lead to product cannibalism and if known and monitored in advance, can help prevent it.
Let’s dig a little deeper to find out what they are.
Reasons for product cannibalism
Cannibalization can be extremely damaging for a retailer – regardless of size or complexity.
Unfortunately, by the time retailers notice, there is an issue, it is already too late for damage control to be implemented.
This is why understanding and awareness of potential triggers are not only important but essential to retail success.
Here are the main causes of product cannibalism to watch out for:
Pricing
Setting the wrong price for a new product can have immediate and costly consequences.
Customers determine the value of a product in the context of the price range. This means any changes in the price of one product will affect the sales demand of all other comparable inventory.
For example, say a retailer introduces a new brand of water bottle into the existing product mix. Its attributes are comparable to the inventory on the shelf (same material and volume). The only difference is a notably lower price point. Chances are that consumers will choose the cheaper product over a more expensive brand.
The water bottle’s price has triggered the cannibalization of existing product sales.
This results in a lower overall profit for the retailer since consumers are buying more of the cheaper product and less of the product they used to buy at a higher price point.
Product Mix
Setting the right price, however, is not enough to avoid potential cannibalization.
Changes in assortment also have a substantial effect on demand – creating the need for an effective product assortment strategy.
A new product can pull sales away from existing inventory simply by splitting consumer demand between viable options.
What’s more, customers may prefer to buy this year’s model over last year’s.
For example, fashion retailers often see products with trending styles and colours pull sales from last season’s top sellers.
Intentional cannibalization sales strategy
Cannibalization affects both revenue and profit.
The overstock of cannibalized products taking up shelf space force retailers into unplanned promotions and end-of-season markdowns to clear the excess inventory.
Although in most cases product cannibalization is an unintentional and unexpected situation, it is possible to use the effect strategically.
Cannibalization sales strategies can be used to replace old inventory with a new selection or to expand a product line.
Carefully planned, this effect can maximize sales and profits by redirecting demand.
To better understand how this is accomplished, let’s look at some product cannibalization examples.
Product cannibalization examples
Intentional Use: P&G expands a product line
After a century of making soaps from animal fats and vegetable oils, Procter & Gamble began developing synthetic detergents in the 1930s. Then-chairman William Procter said of the decision, “This may ruin the soap business. But if anybody is going to ruin the soap business it had better be Procter & Gamble.”
He was right. When P&G launched Tide in 1946, the new product quickly cannibalized the company’s traditional soap brands. Tide took market share from competitors like Colgate and has been the top-selling laundry detergent ever since.
Intentional use: Apple replaces outdated product
Apple founder Steve Jobs famously said, “If we don’t cannibalize ourselves, someone else will.” The company’s current CEO, Tim Cook, has told Wall Street analysts that Jobs’ philosophy remains in place:
“We know iPad will cannibalize some Mac [sales], that doesn’t worry us.”
Intentional product cannibalism keeps customers in the Apple ecosystem where they will buy other Apple products and services. You see similar strategies in fashion and other industries that need to stay “fresh” in consumers’ eyes.
Unintentional use: Kodak launches a low-cost product
Eastman Kodak introduced its first economy-brand camera film, Kodak Funtime, in 1994 to combat low-cost rivals. However, the company worried that the success of the cheaper camera was cannibalizing its more profitable mainstream film brands.
So, Kodak decided it would only let people buy Funtime films in the spring and fall rather than during the peak summer and holiday buying seasons.
That didn’t work.
Kodak customers substituted their Gold Plus film purchases with cheaper products. Inevitably Kodak chose to cancel Funtime to protect its core product line.
Avoiding unintentional product cannibalization
Planning for cannibalization is easier said than done.
The unfortunate truth is, predicting how products interact is extremely difficult.
Every pricing and inventory decision has an impact, but with billions of interconnected data points to consider, retailers are left asking questions like:
- How big will the impact be?
- Will the impact spread to complementary products?
- How will these impacts vary from store to store?
Existing sales databases are used to generate reports that can flag unexpected trends. But these reports are just snapshots of the past. They can only be used to solve issues that already exist — and are getting worse.
Fortunately, innovations in retail technology are enabling retailers to avoid product cannibalism.
Let’s take a look at the 4 most effective methods retailers are using.
1. Predictive analytics
Why is predictive analytics the most powerful tool retailers have to combat product cannibalism?
Predictive analytics avoids product cannibalism because it can actually identify and measure the true effect a product will have at a specific price point, within a specific assortment, and even in every unique store location.
So rather than reacting to cannibalization, modern retailers use AI-powered analytics solutions to proactively plan for it.
These tools use artificial intelligence to simultaneously evaluate the effect of the massive amounts of data points.
Enabling consideration of relevant factors such as:
- Geo-demographics and diversity.
- Promotional uplift.
- Price elasticity of demand.
- Seasonality.
These advanced analytics solutions generate a highly accurate demand forecast that has already accounted for product cannibalization.
Leading retailers leverage predictive analytics when introducing new products. In doing so, they are able to see how the new product will affect the existing inventory.
They are then able to bring in the right amount of new products and set an optimal price, leading to:
- Fewer out-of-stocks and maximized revenue.
- Avoided overstocks and minimized markdowns.
- More predictable promotions and seasonal events.
2. Identifying an optimal pricing strategy
The right new product pricing strategy should maintain a competitive balance among competing products.
Setting a price for a new product is especially difficult because there is no sales history to work with.
With a powerful enough tool, retailers don’t need a sales history to set the optimal price for a new product. This is because, as we’ve already established, product price is not a siloed question.
The demand for a product is affected by a combination of factors.
Advanced analytics software is unified across all business channels, letting retailers optimize their pricing strategies holistically. Not only does this minimize cannibalization within the store assortment, but it also limits cannibalization between online and store operations.
3. Run pricing scenarios
Traditionally, experiments with product and pricing decisions had to happen in the real world.
For this reason, implementing a new pricing strategy, or introducing a new product has always been inherently an expensive risk.
Advanced analytics solutions have removed this expensive and time-consuming risk because they enable retailers to run virtual pricing and assortment scenarios.
Software is configured to the specific retailer’s business limitations and parameters, creating a true simulation of how a specific decision will impact demand. Retailers can run as many scenarios as they need with no risk.
In fact, a unified analytics solution enables retailers to run scenarios for pricing, assortment, and even allocation using their existing sales data to forecast demand.
These tools give retailers the power to select the optimal strategy before investing a year of resources and risking cannibalization, overstock, and lost sales.
You can control product cannibalization
Understanding product cannibalization lets retailers avoid the disruptions that promotions and new product introductions can cause within their inventory.
In fact, a well-thought-out cannibalization sales strategy can lower the cost of replacing outdated inventory or realigning assortments.
Of course, knowing how product cannibalization occurs isn’t enough.
To avoid unnecessary surprises, retailers need to arm themselves with the right tools.
Advanced analytics solutions open a window into the future, enabling retailers to see how their strategies will play out without risking major setbacks like product cannibalization.
