Product Cannibalization: How To Avoid It (Or Use It To Your Advantage)

October 31, 2022
13 min read

In this article:

Product cannibalization isn’t always scary. In fact, some retailers intentionally cannibalize their products to stay competitive. Here's how.

Every direct-to-consumer (DTC) brand wants to launch new products that’ll take customers away from the competition. But as great as that sounds in theory, the reality is that sometimes DTC brands steal sales from themselves — otherwise known as product cannibalization. 

What is product cannibalization?

Product cannibalization (or market cannibalization) is the loss of sales when a new product pulls demand away from an existing one.

But here’s the thing: Every time you launch a new product, that new product will likely displace your existing products to some degree. (The only exception is if you introduce a totally new product line.)

Many times, this hurts your company’s cash flow. That’s because sales for your older SKUs disappear. But, any remaining units of that SKU continue tying up capital until they’re sold. And if left unattended, that leftover inventory can easily turn into expensive dead stock

Some retailers get around this pitfall by intentionally using product cannibalization to stay competitive. But to do this, these brands adjust their inventory levels accordingly, so they’re not stuck stocking an item people no longer want (more on this in a bit). 

Examples of product cannibalization

Product cannibalization happens all the time in the world of retail. Sometimes it’s deliberate (like when Apple and Coca-Cola introduce new products), and sometimes it’s not (Kodak is notorious for this). 

Apple

Apple is the case study in product cannibalization. For decades, it's proactively self-cannibalized to improve its products and prevent other tech companies from dethroning the brand.

You might even remember when Steve Jobs said:

"If you don't cannibalize yourself, someone else will." 

Because of this philosophy, smart self-cannibalization has always been at the heart of Apple's business model. After all, remember when Apple released the first iPhone?

It was back in 2007, at the height of the iPod's popularity. Still, Apple released the iPhone, knowing full well that it would render the iPod useless.

But while sales of the predecessor diminished, the new iPhone attracted tons of new customers (at a much higher price point). This kept Apple way ahead of its competitors. 

To this day, the latest iPhone models continually make older iPhones obsolete. And yet, Apple annually releases another new version, selling millions of iPhones every year and remaining a market leader.

In 2021, for example, Apple generated over $365B in revenue – $191.9B (52%) came from iPhone sales alone. 

Coca-Cola

Back in 2006, Coca-Cola rolled out a new product to the UK market: Coke Zero. 

This Diet Coke alternative aimed to attract male consumers concerned about obesity. (This drink was even nicknamed "Bloke Coke" because of its bid to the British male demographic.)

Coca-Cola knew Coke Zero would take sales away from its female-focused Diet Coke. But in exchange, it would draw in a new demographic: health-conscious male shoppers ages 18-25. 

The net effect? Lots of sales growth. Coke Zero became Coca-Cola's biggest UK launch since Diet Coke was introduced more than 20 years prior. In its first 16 weeks on the market, the soda giant recorded "an increase in sales in excess of £24 million."

Since then, Coca-Cola has continued to cannibalize its signature products with new flavors like Coca-Cola Cherry and Coca-Cola Vanilla. All of which have taken sales away from other product offerings. 

Still, Coca-Cola is continuing to grow. In 2021, it raked in $38B in net operating revenue worldwide. The brand raked in $5B more than the previous year (2020). 

Kodak

Unlike Apple and Coca-Cola, Kodak's market cannibalization wasn't intentional. 

In 1994, Kodak introduced its 1st economy-brand camera, Kodak Funtime, to compete against other low-cost rivals. 

The camera was successful at the expense of the brand's more profitable film offerings. So, the worried brand decided to limit Funtime film availability to the spring and fall (making it unavailable during the peak summer and holiday buying seasons).

This strategy, of course, backfired. Kodak customers started substituting their Gold Plus film purchases with cheaper products (even if it meant switching to a competitor). 

And long story short, Kodak eventually canceled its Funtime film to protect its core product line. But the damage was already done. 

Kodak Funtime is a good lesson in what happens when you don't properly prepare for cannibalization, leading new products to cost the company revenue rather than increase sales.

Unfortunately, Kodak didn't learn from this mistake. The brand would continue to make poor business decisions, allowing competitors to come in and cannibalize its products. (Kodak filed for bankruptcy in 2012 as a result.)

🤿 Dive deeper: Why Kodak is seeing a comeback despite years of market cannibalization.

The 4 most common causes of product cannibalization

No matter what you sell or who you’re selling it to, you need to be aware of potential triggers that can lead to the cannibalization of your product catalog. This includes launching similar SKUs and targeting the same audience.

1. Launching similar new products 

Say your newest product looks a lot like your older ones (and has similar functionalities). Then, there's a chance you'll attract the same customers, creating cannibalization. 

That's because, without obvious new features or a reimagined aesthetic, you don't have a product assortment. You have multiple versions of the same products.

When this happens, you're splitting demand between 2 seeingly viable (and comparable) options. So, most customers will adopt the "new is always better" psychology, where they perceive new products as superior or more valuable. 

As a result, they'll opt for the latest version, pulling sales away from your existing products — rather than buy both. 

2. Targeting the same audience

Just like launching similar products is a recipe for product cannibalization, so is targeting the same audience. 

When you gear a new SKU toward the same customer base as an existing one, you'll ultimately divide customer demand. 

That's because most customers are working with a limited discretionary fund. So, they likely can't afford to buy all the products you're marketing to them.

Meaning, rather than buying your new product and your older inventory (like you might expect), customers will choose whichever one they like best. If everyone shares a similar opinion, a few SKUs might be cannibalized. 

3. Lower prices of comparable products

Careful: Lower-priced products can quickly steal sales from your higher-priced offerings. Particularly if there's not much difference in features, functionality, or quality. 

For instance, say you sell water bottles. You recently increased the prices of your higher-quality stainless steel bottles. 

As a result, your aluminum bottles are now remarkably cheaper, despite holding similar volumes and looking virtually the same. In that case, you can bet customers will opt for the aluminum version. And as you can imagine, this can seriously hurt your profits longterm. 

This type of cannibalization is especially common for products that people tend to lose or often replace (like sunglasses). The more frequently customers purchase this item, the more likely they will opt for a cheaper and cheaper replacement. Meaning, you'll miss out on more revenue every time they restock. 

4. Intentional cannibalization strategy 

In most cases, market cannibalization is unintentional – but not always. Intentional cannibalization is a sales strategy where a new offering is positioned to replace an existing one. 

When well executed, this type of cannibalization can actually maximize sales by redirecting existing consumer interest where you want it. (You might even increase demand if you can re-engage churned customers or current customers who already have all your products.)

Apple introducing newer (and typically more expensive) iPhones is a solid example. 

How does the tech mogul pull this strategy off? Immediately following the launch of a new model, Apple drops the price of their older iPhones. By doing so, the brand clears out excess inventory. That way, it can sunset the older model without needing massive inventory write-offs. 

How to calculate product cannibalization 

To calculate product cannibalization and monitor potential risks posed by new offerings, use the following formula:

cannibalization rate = (lost sales on old product) ÷ (sales of new product) x 100

To determine the lost sales on an old product, you'll want to subtract this year's sales from last year's sales. So, if an existing product sold 10,000 units last year but only 7,000 units this year, its lost sales would total 3,000. 

Now, say you moved 5,000 units of the new product in that same period. You can take this information and quickly plug it into the cannibalization formula. 

cannibalization rate = 3,000 ÷ 5,000 x 100 = 60% 

This means nearly the new product may have taken roughly two-thirds of the existing product's sales. 

📝 Note: This equation is just an estimate, and other factors might be at play. For instance, these sales may have fallen due to changes in consumer trends, a reduction in marketing activities, or approaching your market cap instead.

Product cannibalization & market share

As we touched on a bit earlier, product cannibalization usually happens in 1 of 2 ways: accidental or deliberate. Although these are 2 sides of the same coin, they can have very different consequences for your brand.

Accidental product cannibalization 

Accidental cannibalization is what happened with Kodak. A new product rollout (or, in the camera company's case, a few) was poorly planned, harming the sales of existing items (that had better product margins).

🤿 Dive deeper: The right way to launch a new product

This failure to accurately forecast demand and anticipate customer behavior led to a dramatic shift in sales. And as I already mentioned, repeated incidents of accidental cannibalization eventually drove Kodak to file for bankruptcy.

But the Kodak example illustrates another important point. When older products become obsolete in the eyes of your customers, you're likely to accumulate a lot of dead stock for those SKUs.

Not only does dead stock rack up tons of extra holding costs, but it also creates a lot of costly waste at your warehouse. This is avoidable if you have a solid grasp of future customer demand.

That said, on rare occasions, accidental cannibalization might not be such a bad thing. When Procter & Gamble launched their first synthetic detergent (Dreft) in 1933, it unexpectedly impacted the sales of its bestselling soap products. 

While Dreft (and later Tide) killed the demand for soap-based laundry products, they opened up a new $100B+ market. Plus, an entirely new revenue stream for P&G. 

But, even though things worked out in P&G's favor, this isn't a strategy you can count on. Accidental cannibalization is simply too risky (and has too many unknowns) to be left to its own accord.

Deliberate product cannibalization

Deliberate cannibalization is the exact opposite of accidental cannibalization. With it, retailers consciously decide to overtake an older product's sales with a new SKU. 

The goal is typically two-fold: 

  1. Phase out older inventory (assuming that an older SKU is being sunsetted to make space for this new one)
  2. Gain more market share (AKA, a larger percentage of overall sales in their industry)

Case in point: Apple has earned a huge market share in the mobile phone industry by continuously releasing new iPhones and limiting how long each model stays on the market.

As of April 2022, the iPhone 13 was the most popular smartphone sold in the US, representing 17% of total smartphone sales. Better yet, the leading iPhone models make up about 37% of all smartphone sales in the US to date.

Undoubtedly, Apple's calculated approach to launching new products has worked in its favor. So much so that they've implemented similar cannibalization strategies to keep themselves at the forefront of their other categories (like computers and smartwatches).

How to avoid accidental product cannibalization

You now know how much accidental product cannibalization can hurt your bottom line. So, how do you stop this from happening to your brand?

Conduct detailed market research

Before introducing a new SKU to your product portfolio, start by conducting detailed market research. 

Your market research can be broken down into 3 parts:

  1. Current market analysis
  2. Product demand analysis
  3. Competitive analysis

First, you need to understand the ins and outs of the current marketplace. This means diving deep into marketing analytics — like customer engagement and conversion rate — to uncover your target audience and their buying patterns.

Next, you'll want to confirm that there's actual demand for your new products. This can be tricky without historical sales data. But you can do this by looking at sales for any similar products you already offer. Alternatively, you can look at current data for your competitor's comparable products.

The goal is to ensure there is enough demand for your new product. And that even if that demand takes away sales from your older inventory, your total revenue will increase overall.

Lastly, it's always a good idea to assess the competitive landscape. This way, you can look for market gaps and learn from other retail brands' mistakes. Essentially, you're trying to capitalize on a weakness in a competitor's offerings, so you cannibalize their sales rather than your own.

Offer complementary products

A complementary product is anything bought and used with another SKU in your catalog (think: a phone company offering SIMs cards). Because complementary products, well, complement this other product, they usually don't have tons of value on their own.

The purpose of them is to increase demand for your existing hero products. Since these products are most valuable together, the newer item won't cannibalize your older ones. Instead, customers will typically buy both items – increasing your total revenue. 

Take Harry's, for example. Though they're primarily recognized for their razors, Harry's sells other grooming products like shave gel and face wash. 

These products complement their bestselling razors, leading to sales growth rather than stealing its spotlight. (In 2021, 43% of Harry's revenue was generated from categories other than shaving.)

Create distinctive SKUs

Along those same lines, you want to be sure your products are distinctive. 

Say there's no clear differentiation between a new product from your existing one. Chances are good that you'll just transfer demand from one of your products to the less expensive or newer one, depending. (All while leaving your competitors totally unaffected). 

Here are a few ways you can innovate that won't cause product cannibalization: 

  • Create a unique product that appeals to an all-new demographic
  • Add new features or upgrades that will appeal to your target audience
  • Offer premium products that appeal to folks who aren't budget-conscious
  • Launch limited edition products that appeal to a wider population

The steps you take to make your products distinctive will go a long way in reducing your cannibalization rate — and possibly even attract new customers to your brand.

Even better, you can differentiate similar products on your website using a "compare products" tab. Apple does this and gives its customers more confidence along the buyer journey. (With this tool, people sometimes even convince themselves to buy the more expensive option.)

Apple allows customers to quickly compare similar products
Source: Apple

Optimize pricing strategy

Pricing new products is tricky. But getting it right makes it easy to prevent cannibalization (and stay competitive in the market). 

Similar to when you conduct market research, you can reference historical data for existing products in the same category or look at current data for comparable products in the marketplace. While this isn’t an exact science, it still gives you a pretty good gauge of what customers are willing to pay.

In any event, examining this data is better than pricing products at random. If you’re just guessing what new SKUs should cost, you might end up pricing them too low and cannibalizing your older product offerings. (Or too high, never giving that product a fighting chance.)

Once a product is on the market, you can always run price testing to determine the ideal price for your goods. Simply put, price testing shows you how actual customers respond to different pricing models. That way, you can better understand what they’re willing to pay for said products.

🤿 Dive deeper: How to experiment with product pricing to unlock growth 

Gather customer feedback

Like it or not, it's impossible to know exactly how your target audience will react to a new product launch.

Despite your meticulous planning and research, your customers might throw you for a loop by showing up in droves for your release or not showing any interest. However, you can remove some of this unpredictability by gathering insights straight from the source: your customers.

Ahead of your launch day, email customer surveys or organize focus groups to discuss your product, its packaging, and any associated marketing messaging. 

For instance, you might discover the wrong audience segments are attracted to your products. But with this information, you can push back your official rollout (if needed) and switch up your marketing strategy. 

Monitor sales & regularly calculate cannibalization rate

While gathering feedback should always happen before your launch date, monitoring your sales comes after your product has been released into the wild. 

Once launched, you'll want to monitor the product's individual sales — and the sales of any related or similar products — on an ongoing basis. This way, you can act fast if there's been an unintended effect on your existing product sales. 

Calculating your cannibalization rate on a monthly (or quarterly) basis is an easy way to do this. 

But however you go about it, you'll need to stay on top of your sales and observe the impact of your new products. That way, you get ahead of any potential product cannibalization before it wreaks havoc on your revenue. 

Build strategic product plans with Cogsy

As you already know, every product launch will cannibalize your existing product to some degree. 

But if you want to prevent that cannibalization from hurting your revenue, you need to accurately predict: 

  • To what degree each product will be cannibalized
  • How that will impact your inventory needs

Luckily, Cogsy works as your crystal ball in this regard. The ops optimization tool takes your historical sales data and crafts a new product plan that is way more accurate than getting your palm read.

Using Cogsy’s new product planning feature, you can:

  • Use products with similar characteristics to your new product to model how much you’ll need to order for a successful launch
  • Map out your new product launch scenarios based on different related SKUs and prepare accordingly
  • Factor in order lead times to purchase products at the right time (and keep your suppliers happy with you)

Best part? Cogsy will update your inventory strategy every time new data becomes available. So, you’ll know almost instantly if new products are cannibalizing old ones (and by how much). That way, you can get ahead of it. 

But don’t take our word for it – try Cogsy free for 14 days!

Product cannibalization FAQs

Get answers to the most common product cannibalization questions. 

What is cannibalization in the supply chain?

Cannibalization in the supply chain is when manufacturers create a new version of a product that takes away sales from the original product (rather than taking away sales from a competitor). This cannibalization can happen intentionally or by accident. 

What are the types of product cannibalization?

Product cannibalization usually happens in 1 of 2 ways: accidental or deliberate. Accidental cannibalization is when a new product rollout is poorly planned. Therefore it harms the sales of existing inventory items. Meanwhile, deliberate cannibalization is when retailers consciously decide to overtake an older product to gain market share.

Is product cannibalization a good or a bad thing?

Depending on the situation, cannibalization can be good or bad for business. When cannibalization results from a poorly planned product launch, it’s likely to harm the sales of existing SKUs (bad). But when cannibalization is done intentionally, it can help to phase out the older inventory and acquire a greater market share (good).

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