Product cannibalization in retail

In retail, a newly released product can cause a loss of sales for other items within a company’s product portfolio. This is known as product cannibalization, and occurs when the demand for the new product detracts from the demand for existing products, causing a marked loss of revenue for the items that preceded it. 

Sometimes, product cannibalization is an unintended effect, and a company will make an effort to recover the lost sales across its product portfolio. Other times, product cannibalization can be part of an intentional strategy to lead with a new product, attract greater audiences, and grow bottom line sales with a new, more premium-priced item. 

In CPG, product cannibalization is a common phenomenon that can be studied to derive insights about new product innovation and consumer shopping behavior, and can be used to guide a retail strategy.

Product cannibalization is a bit different from regular competition, because it occurs within a company’s own portfolio of products. It is when a company’s new product effectively “steals” sales from its other products – without growing the category or the company’s net revenue.

What is Product Cannibalization

CPG brands compete against one another for sales every day. Companies are no stranger to retail’s competitive landscape, and are always devising and reworking strategies to maintain and increase their market share. 

Product cannibalization is a bit different from regular competition, because it occurs within a company’s own portfolio of products. It is when a company’s new product effectively “steals” sales from its other products – without growing the category or the company’s net revenue. Instead of attracting new customers or driving multi-SKU purchases, the new product simply “cannibalizes” – or eats the sales – of their other products. 

For the supplier, this can cause compounding, excess inventory of its other products that may lead to a loss of revenue, and affect relationships with retail buyers. 

Retailers are not always keen on the phenomenon of product cannibalization, as they lose sales on the neglected products, just as the brands do. The excess stock can also take up space on the shelves or back rooms– valuable real estate that may be better served by another brand’s goods. 

However, savvy brands are utilizing product cannibalization to guide their sales strategy, rethink product innovation, and prove incrementality (the ability to grow a category through sales of different products) to retailers. 

Potential Reasons for Product Cannibalization

Product cannibalization can occur for a number of different reasons, depending on the product’s pricing, the type of product, or how the category is evolving. As mentioned above, the effect of product cannibalization can be an unintended result of taking new products to market - or a strategic move by a supplier to alter their product mix over time. 

Pricing

If a supplier releases a lower-priced item that is similar to their other items, consumers may choose to only buy that product. In order to maintain sales volume of the higher-priced item, the company will need to communicate its differentiated value. By clearly communicating the features and benefits of differently priced items, brands can attract new audiences with diverse values – and increase top-line growth rather than lose sales to their cheaper SKUs.

Product cannibalization can also occur when an item is discounted. Discounting products can be considered a method of intentional cannibalization, in an effort to sell through a product more quickly than others. In any case, suppliers will want to consider how promotional pricing will affect sales for other products within their assortment.

Product Mix

Leading CPG brands meet consumers’ demand for variety by maintaining a wide assortment of styles, flavors, product types and pack sizes within their product mix. They are able to maintain sales across the different items, and avoid product cannibalization by distinctly communicating the value of each item.

Introducing a new type of product can result in cannibalization of sales if it comes across as more valuable or useful than existing products. For example, a new, all-in-one cleaning solution can displace a brand’s other cleaning products. Or shoppers may reach for a new food or beverage product with added nutritional or health benefits, instead of a brand’s other products that are without them. 

Sometimes, product cannibalization can occur when the new product is simply more flavorful or exciting. 

New product development is an important process that CPG organizations invest in to meet the emerging needs of consumers, and can be leveraged to maintain and grow market share through the introduction of trending and all-together new product concepts. When done successfully, brands can attract new consumers, in addition to their loyalists and grow their product mix with success. However, new product development can also result in product cannibalization, triggering displacement of existing items by making them seem redundant. 

Examples of Product Cannibalization

Unintentional product cannibalization 

Say that a grocery wine brand sells bottles of wine priced over $20, and releases a red blend with a special label to draw in a new customer base – priced under $20. The wine brand faces product cannibalization when new customers and brand loyalists alike purchase the new red blend instead of the other bottles. This becomes a bigger cost issue if the customers make the same repeat purchases, because the brand’s perceived value will begin to align with the lower priced item. It will prove challenging to regain the sales volume of the original products, and their production costs can amount to lost revenue.

A snack brand experienced product cannibalization when it released a line of chips that are crispier because they are cooked in a new oil, and more irresistible because of new and exciting flavor additives. The product was intended to serve as a line extension, but due to customer demand it has effectively cannibalized sales of the other products. While the new products generate promising profits, the company did not anticipate loss of sales for their other goods and is struggling to resolve them. 

Intentional product cannibalization

Apple is a classic example of a company that plans for product cannibalization and leverages it to attract and retain new customers. For starters, the iPhone is considered to have cannibalized the iPod (and smartphones as a whole are considered to have cannibalized the digital camera). Today, new generation iPhones cannibalize former models by including newer features for a relatively low price increase.

The iPad also cannibalizes some sales from Mac computers, but the company plans and allows for this considering that it keeps customers in the Apple product ecosystem.

If a CPG food company conducts market research, and finds that its target market prefers options with added health benefits, the company may release a healthier line extension, and build awareness around it with a national marketing campaign and attractive design elements that call out the new features. They do not advertise for the original, more processed and sugary line and intentionally allow the new products to cannibalize its sales. Since the brand planned thoroughly for this, they did not overproduce the former products and enjoy a healthy new revenue increase overall.

Calculating Product Cannibalization

There is a method for calculating a cannibalization rate to better track its impact within a business. By calculating the cannibalization rate for different products after a new product release, a company can make better decisions about how to address the issue. 

The formula for a brand to identify a product cannibalization rate is:

Product cannibalization rate = (number of sales lost on existing product ÷ number of sales of a new product) x 100

• With number of sales lost on an existing product = Last year’s units sold – this year’s units sold (ex. 2000-1000=1000)
• And sales of a new product being the number of units sold of the new product SKU in the same period (ex. 2500)
• For example, (1000/2500) x 100 = 40% cannibalization rate

When CPG brands release new products, some degree of product cannibalization can be expected, with the trade off being that the new product begins to gain traction in the market. By using the cannibalization rate formula, companies can identify which products are losing the most sales and strategize how to recover the lost revenue.

Crisp YoY sales dashboards provide the necessary information to calculate cannibalization rates for any given product, and the platform provides near real-time data reports to monitor cannibalization trends immediately after going to market with new products.

Introducing a new type of product can result in cannibalization of sales if it comes across as more valuable or useful than existing products. For example, a new, all-in-one cleaning solution can displace a brand’s other cleaning products. Or shoppers may reach for a new food or beverage product with added nutritional or health benefits, instead of a brand’s other products that are without them. 

How to Avoid Unintended Product Cannibalization

Companies should always tap into data before going to market with new products, and keep a close eye on their sales after doing so. 

Research

Market research and market testing are important elements of a go-to-market strategy because it provides a preview of how new products will perform in the market. A brand can also test their original products along with the new items to gain insight on how they will perform together. If the audience disproportionately favors the new product, a brand can plan for some degree of product cannibalization.

Companies should also refer to their existing regional and store-level data for insights about product sales and trends in different locations. Using Crisp, companies can research and identify areas of regional opportunity to strengthen their sales strategy.

Sales Plan

A company should ensure that a new product release aligns with their fiscal sales plan. There should be a plan in place that considers potential product cannibalization losses, and forecasts new sales that meet and exceed revenue targets. “Measure twice and cut once” is sage advice that stresses the importance of sales planning before going to market with new products. 

The Crisp platform provides sales and finance teams a single source of truth for data to design a hardy sales plan. 

Pricing Strategy

Recall that pricing itself can cause product cannibalization. Consumers tend to reach for a lower priced item, if the value of two comparable products is not distinguished enough. CPG brands will need to conduct a pricing analysis that compares their new product with other products in their portfolio, and plan for sales of all the products to meet revenue targets set in the fiscal sales plan. 

Monitor and Identify

After going to market with a new product, companies can use Crisp to receive near real-time data that accurately shows how it, and other products are performing - down to the individual store-level. By tracking sales velocity, before and after a new product launch, brands can use the cannibalization rate formula to identify cannibalization activity much earlier than without the data. In doing so, the company can implement a plan to recover lost sales before they compound and affect top-line revenue. 

Conclusion

A company can avoid product cannibalization by innovating and going to market with products that are complementary to – and not competitive with – other products in their assortment. When successful, new products attract new consumers to a brand without affecting the sales velocity of other items, effectively generating a new revenue stream that helps the company grow. 

It happens that sometimes, product cannibalization is necessary to shift the product offerings as a whole and evolve the company’s positioning. 

By using data at every stage of new product development, through to launch and after, to monitor sales, companies can anticipate and plan for product cannibalization. Doing this can ensure success, while leaving things to chance can be detrimental for sales. Today, companies are using data to track multiple variables and optimize the performance of every product they offer, and having full visibility over the phenomenon of product cannibalization.