Cannibalization is a marketing concept that recognizes the fact that new product growth is often achieved at the expense of existing products. Hence the importance of knowing the cannibalization rate of your business.
Let’s learn more about this concept, how it works and how to calculate your company’s cannibalization rate.
What is the cannibalization rate?
The cannibalization rate is the measure of market cannibalization for a company. It is the percentage of sales of existing products that the introduction of a new product has affected. A company considering launching new products calculates the cannibalization rate. For almost any similar product introduced into the same market, market cannibalization is inevitable.
Therefore, companies calculate the cannibalization rate to determine whether market cannibalization will be acceptable. This rate is crucial for companies when developing strategies for the introduction of similar or substitute products. For example, Apple, Inc. will calculate the cannibalization rate of its iPhone 13 product to see how it will affect the sales of its iPhone 12 product.
In general, the cannibalization rate represents the effects that the introduction of a new product will have on current products. Companies measure this impact in terms of sales.
Some companies produce new and improved products as part of their strategy to maintain existing market share. However, if the introduction of new products has a significant impact on their current products, these companies may reconsider their options.
In general, cannibalization or competition between two products does not increase the company’s market share despite the new product.
How does market cannibalization work?
Market cannibalization occurs when a company launches a new product on the market. This new product then interferes with the quotas of the company’s existing products. This process can occur in markets where the company has several products. When one of these products gets old, customers will gravitate toward the new items instead of buying the older ones.
The company will experience sales growth for the new product. However, you will also lose your market share for the existing product, leading to a decline in revenue and profits.
The main cause of market cannibalization is that companies appeal to their current customers. When companies fail to attract new customers, they will suffer from introducing new products.
For any company, the ideal is to launch a new product while maintaining its current market share. However, when their products interfere or compete with each other in the market, adverse effects occur. This phenomenon is common in sectors such as technology or food. These sectors experience declining revenue from existing products as new products gain market share.
How to calculate the cannibalization rate?
Calculating the cannibalization rate of a new product is challenging. Companies need to have solid estimates before calculating the cannibalization rate. To do this, they need sales of the new products and their existing products. For companies that calculate the quantity before launching a new product, sales forecasting will be essential.
Once you have the necessary information, you can calculate the percentage using the cannibalization rate formula below.
Cannibalization rate = Loss of sales of existing product / sales of new product
Companies can also use another formula for the cannibalization rate that will provide the same result:
Cannibalization rate = Sales of new products that will replace existing ones / total sales of existing products
Market cannibalization occurs when a company launches a new product that affects sales of its existing products. The cannibalization rate is the measure of market cannibalization of a product. It represents the percentage of sales that a new product will replace the sales of existing products.
In order to carry out an effective analysis of the health of your business, you can rely on the use of a dashboard. This data visualization tool will allow you to monitor data from various sources in the same space, be able to filter data and detect trends or important points for your business.
With the help of a dashboard you can see at a glance this and other sales indicators that are relevant for decision making and meeting your commercial objectives.