The cannibalization rate is the percentage of existing product sales which is impacted by the issuing of new products. The company may release the next product version 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 in which new features determine the winner in the market.
In a competitive market, we have to be the first to release new features products otherwise the competitors will take the opportunity to increase their market share. But we have to balance with the cannibalization impact on our existing products.
Cannibalization Rate Formula
Cannibalization rate = Sale loss on the existing product / Sale of new product
It is not easy to predict the amount of loss in the old product 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, a Phone company 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 amount of the old products which we expect to occur when new products issued. The company needs to estimate this 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.
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.