Cannibalization ¿is it good or bad?

April 17, 2011 § Leave a comment

Long has been spoken about the needs and issues of “line extensions” in a portfolio. So I will only say that it is a “necessary illness”.

It is needed because:

  1. Brands like to be dynamic.

  2. Brands like to pursue and satisfy consumer desires.

They are also an illness because:

  1. In order to be profitable you need to be flexible.

  2. It’s cheaper to produce 1 model than several.

 

What happens if you don’t innovate?

PROS

CONS

1. No need to change production line

2. More efficiency on production line

1. Volumes will deter because you lack to offer the “wanted” product.

2. Brand gives perception of “traditional / old”

So, as a Marketeer, I must continue to push forward most innovations.

Now, given the fact that you share my vision about innovating through product launches (sometimes line extensions) you will have cannibalization. The amount of it will depend on the maturity of the category, whereas a more mature category will have more cannibalization than a younger category.

How do we “take advantage” of the cannibalization?

There only way a cannibalization works on your favour is that the new product is more profitable than the “old”. This analysis should include the extra cost of production and handling the new sku, the difficulty of managing a broader portfolio.

In the global market is possible to watch several cases of cannibalization of products. Some of them very famous. In 1964 a branded soft drink named Pepsi decided to launch a diet version of their famous pepsi to satisfy an incumbent demand for a “healthier” soda. This demand couldn’t be satisfied with regular coke, but being afraid of the cannibalization to regular coke, Coca-Cola hesitated to develop the line extension. After some harm was done, in 1982 Diet Coke was born, proven to be a great innovation (cannibalizing some volume) but keeping profitability within Coca-Cola’s bank accounts. Nowadays, Diet Coke is the second largest soft drink sold in the US, over regular Pepsi.

Extensions like this have happened in almost all types of products. So, If you face the option of developing an innovation (and you are afraid of cannibalization) you should at least be capable to answer:

In the consumer’s mind:

  • Is the product a substitute for current offer?
  • Is the product a compliment to current offer?
  • Is the product designed for new occasions? New consumers?
  • How the consumer does rates the product? Is it better than the current offer? Will he/she pay more for it?
  • Is it easy to understand? Will it conflict with current habits?

For the business:

  • Is it more profitable than current offer?.
  • Are there any products alike in the market? Will you be the first to offer?
  • Are you capable of “upscale” in short-term? May another brand “steal” the idea?.
  • Is it protected (copyrights, patents, etc)? May private label “copy-cat” the offer at cheaper price?.
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