Market Cannibalization

What is Market Cannibalization?

Market cannibalization refers to what happens when a company's original product is in less demand than its new product. In a company, when cannibalization takes place, the business goes through loss in sales volume, revenue and market share. Many-a-times, because of cannibalization companies do not release their new products so that the demand for their old products doesn’t decline. When a firm produces a new product or new service, their major goal is to attract existing customers and also new customers. However, sometimes a new product attracts a large following.

For instance, company XYZ, is a manufacturer of chocolate shakes. In order to increase its customer base and revenue, the company decided to produce another line of product, i.e. healthy fruit shakes. With health concerns increasing in the world, this company attracts a large number of followers for their new product. But, at the same time, they witness a huge decline on chocolate shakes. This shows that customers are preferring the healthy fruit shakes than the chocolate shakes.

The example signifies that cannibalization can cost a company a huge amount of revenue. This often happens when the firm fails to perform due diligence before launching its new product. In worst cases, the company's original product phases out of the market completely. However, sometimes a business intentionally cannibalizes its own existing product with a new product. This is a strategy for growing and expanding its operations.

For instance, assume the chocolate shake Manufacturing company XYZ, twists its chocolate shakes instead of introducing healthy fruit shakes. This improvement is made so that the company attracts the same customers. So, they could start selling healthy chocolate shakes. The company does this deliberately because not only does it want to maintain its current customers but also attract new ones.

Example of Market Cannibalization

Apple Inc. is a great example of market cannibalization. The company uses this to its advantage. When Apple produces a new iPhone it does not shy away from releasing it in the market. It makes sure that the phones are available on every retail store and online store as soon as the product is released.

It knows the release of this new phone can reduce the sales and demand of the older version. However, Apple covers for this loss by capturing its competitions’ current customers, thereby, increasing its client base.

Amazon is another company that is done well with market cannibalization. It runs an online retail company where customers can purchase different goals at the same time it also has a chain of stores called Amazon Go.