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iPOTT

11-Feb-12

Getting you there‌

Cannibalization as a Tool

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Cannibalization is the process by which an existing mature product gradually loses its demand in market when new, similar products are introduced into market by its vendor. Looking at it from sales perspective it is detrimental to company as the old and the new products will gradually lose their market share. Assume a product that is priced and positioned as a premium product on shelf by a vendor. It has gained loyal customers over a period of time, the vendor has created a brand image that is now associated with the product and the market base is gradually expanding. The vendor company now looks at other prospects to make profit. It decides to come up with a new product which is similar to the premium product, but is priced lower and positioned accordingly in the same market. Potential customers who could earlier not afford to buy the premium product now target the lower priced product and realize that it has similar features. As more and more customers realize the benefit of this cost arbitrage, even loyal customers of premium product shift their preferences to new product. This does not last for long. Sales figures gradually diminish as the lower cost raw materials used to manufacture the new product creates a difference in brand value. The new product on shelf has created a negative influence over brand image and customers now look for alternative vendors selling similar products at lower prices. Many other industries could be affected in a similar way. Retail, Automobile and Computer hardware industries could experience similar effects. For instance recent developments indicate that Tablets may cannibalize PCs, notebooks and mini-notes. The recent trend is growing consumerism resulting in improvements in car designs and changes in components

1|P a g e DN: 009/GG/2012 V1.0

Copyright Š 2012 iPOTT


iPOTT Getting you there‌

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which could have a cannibalizing effect as people opt for the most economical solution. But looking at it from technology growth perspective, this is constructive and some companies are adopting this solution to be first-movers and market leaders in innovations. The idea here is that certain players believe in risking their product brand names to come up with alternatives in market. Many rely on Re-branding strategy in later stages if the product brand image is damaged. Consider Starbucks which is the largest coffeehouse company in the world offering premium roaster and specialty coffee. The brand value in this case is the ambience of store and taste of coffee. Its strategy to expand its market share in a locality is through Self-cannibalization. They believe in opening more than one outlet in the same locality to attract customers. All those outlets that do not sell well are cannibalized, and the few that remain are successful in the market. Applying the same to an emerging Software product development company with only one or few products in its portfolio, it could be a means to target customers at different levels. The cost arbitrage and trade-offs in offerings may be used as a differentiating factor in the initial stages to penetrate into market. The important message however is that cannibalization is a process that can be controlled and manipulated by certain players in market to suit their needs depending on their offerings.

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2|P a g e DN: 009/GG/2012 V1.0

Copyright Š 2012 iPOTT


Cannibalization as a Tool