Cannibalization Rate

The cannibalization rate is the percentage of existing sales which is impacted by the issuing of new products. The company may release the new product with more features and it tends to replace the current one in the market. More or less the sale of the current products will drop as the customers are highly likely to purchase a newer product rather than the old one. This kind of movement is always happening with new technology products which new features determine the winner in the market.

In a competitive market, timing is everything. If we want to maintain our market share, it is essential that we are the first to release new products with new features. Our competitors are always looking for an opportunity to increase their market share, and if we do not stay ahead of them, they will be more than happy to take advantage. In order to be successful, we need to make sure that we are always one step ahead of the competition. We need to be constantly innovating and releasing new products that meet the needs of our customers. Only by staying ahead of the curve can we hope to maintain our position in the market.

When launching a new product, companies must be careful to avoid cannibalizing sales of their existing products. Cannibalization occurs when the new product steals market share from the existing product, leading to lower overall sales. In some cases, cannibalization may be acceptable if the new product is significantly better or cheaper than the existing product. However, in other cases, it may be necessary to take steps to minimize cannibalization, such as segmenting the market or carefully timing the launch of the new product. By taking these factors into account, companies can avoid the negative impact of cannibalization on their business.

When a company releasing a new product considers the potential cannibalization rate, it is taking into account the possibility that some consumers will switch from its existing product to the new product. This is inevitable to some degree with any similar product introduced into the same market. While this may seem like bad news at first, there are actually some potential positives to market cannibalization. First of all, it can increase overall awareness of the company and its products, leading to more sales overall. Additionally, cannibalization can force the company to continuously innovate and improve its products, which is good for both the company and its customers. In the end, a healthy level of market cannibalization can lead to increased sales and a better product lineup for everyone involved.

Cannibalization Rate Formula

It is not easy to predict the sale of old and new sale product. Different companies may use different methods and historical data to make such a prediction. It also includes some PESTLE analysis to close the gap between prediction and actual data.

Cannibalization Rate Example

For example, Apple releases a new phone every year in order to update the previous phone and catch up with the competitor to maintain the market share. Base on the history data, the sale of old products will decrease around 100,000 units after the release of a new phone. Base on the budget, this year’s new phone expects to sell around 500,000 units.

Cannibalization rate = 100,000 / 500,000 = 20%

It means that only 80% of sales from the new products will increase the total sale of the company. 20% of the sale is transferred from the old product to the new product.

Break-Even Cannibalization Rate

The Break-even cannibalization rate is the maximum sale of old products which we expect to loss when new products released. The company needs to estimate the impact from new products on the existing one. It is the loss of sale on the existing products which equal to the increase of sales in the new products.

It is a key factor to be analyzed before releasing new product, otherwise we may not making profit for new product but just the transfer from old one which still have potential in the market. Analyzing the potential profitability of a new product before releasing it onto the market is essential for ensuring that your business is making a profit. There are a number of factors to consider when conducting this analysis, including the current demand for the product, the potential competition, and the cost of manufacturing the product.

If the rate is big, the old product may still have potential growth and the features are ahead of the competitors. We may consider delaying the new one and wait for the peak is over.

Conclusion

Market cannibalization is a complex issue that companies must carefully consider when launching new products. On one hand, a certain amount of cannibalization is inevitable and can even be beneficial, as it can signal to consumers that a company is innovating and keeping up with the latest technology and features.

On the other hand, too much cannibalization can damage a company’s bottom line and reputation. As such, calculating the potential cannibalization rate of a new product is essential for determining whether or not it is worth bringing to market. There are a variety of methods for calculating cannibalization rate, and the most appropriate method will vary depending on the products involved and the market context.

Ultimately, understanding market cannibalization is key to making informed decisions about product development and launching strategy.