Price Cannibalization
Price cannibalization is the situation that happens when a business launches a new product that negatively impacts the sales of its existing products. Companies can create internal competition when they launch new products or change prices because they attract the same customer groups. This may result in a net revenue loss if customers decide to buy cheaper versions. But, sometimes, it can be a conscious decision if a company aims to take market share from its competitors. Then, sales of the alternative product can make up for the revenue loss.
Price cannibalization is common in ecommerce and retail industries. Companies target the same audiences, and their product lines overlap. Demand for new products may lead to excess stock of older items. This complicates inventory management. On the other hand, if there has been poor product differentiation, a conscious cannibalization can be made with discounts and promotions to reduce inventory of the old products.
How to Notice Cannibalization
Early detection of price cannibalization is essential to minimize its effects on a business. Common signs to notice price cannibalization;
-Sales decreases for the old products following the launch of a new one,
-Revenue stays flat despite new product introductions and
Additionally, an increased inventory for certain products indicates poor product differentiation.
Steps to Prevent Cannibalization
Identifying distinct customer groups for each product is important to be sure that new launches address unmet needs. Let’s say a retailer has introduced a new size option or a new version of an existing product. The product should target different demographics to effectively navigate market competition. It is necessary to differentiate offerings with product positioning that is supported via unique branding, features, and marketing messages. Pricing also matters. New products should not be priced too closely to existing ones. Companies should use value-based or premium pricing to reduce product overlaps. Finally, data analytics are important for assessing sales and market trends. This, too, will help identify and address early signs of price cannibalization.
Why Cannibalization is Important
Price cannibalization offers several advantages for businesses that want to grow in competitive markets. One key benefit is growth in market share. Companies can capture new customer groups with new products and services using smart product placements. Businesses should also design their product offerings and pricing strategies accordingly. Price cannibalization builds brand loyalty, encouraging existing customers to upgrade within the brand rather than exploring competitors. Adapting products to changing customer preferences also shows the company’s responsiveness to the market.
Applications in Business
Ecommerce
Online retailers use dynamic pricing to attract price-sensitive customers. But, if merchants reduce prices excessively on new products, customers may not prefer to purchase older products. Merchants should keep in mind that seasonal sales and promotions may not be suitable for newly released products.
Product Line Expansion
Introducing a less expensive version can attract additional customers. Existing customers might also switch to the cheaper option, which reduces overall profitability. Companies can focus on the benefits of the elevated version of the product to avoid this switch.
Practical Example
Price cannibalization can be seen in the Apple ecosystem as well. Apple launches new iPhone models continuously. The release of the iPhone 15 drew attention away from the oldest iPhones in the market, even if not the iPhone 14 or 13. Even though this strategy cannibalized the older model sales, it kept customers within the Apple ecosystem. The result: higher customer loyalty and increased revenue.
Wrap-Up
Price cannibalization sometimes helps businesses to attract new customer groups and maintain brand relevance. But, companies must examine its impacts on existing products to avoid profit losses. It is necessary to observe price cannibalization and balance the time of product launches. This approach allows merchants to thrive without sabotaging their success.