Cannibalization Rate in Sales and Marketing – Apptivo

Innovation is the key to facing acute competition across industries. Most business executives believe that innovation changes the customer’s outlook on their companies. Hence, companies follow the pattern of continuously innovating their existing products or launch new products to replace their outdated products. Though not all the companies favor the new product launch route, there are reasons behind the setting up of new products into the market.

In the end, there are multiple risks associated with the launch of new products. According to Professor Clayton Christensen from the Harvard Business School, more than 30,000 new consumer products are launched every year and 95% of them fail. Then, you must be wondering why companies take this risk? This is where the concept of cannibalization comes into play.

In this blog, we will discuss the concept of cannibalization, the calculation method, and how to prevent them.

What is Cannibalization?

Picture this: A company XYZ sells LCD products as their base product. As a move towards innovation, they start launching LED products. However, this causes most of their existing customers to stop purchasing LCD products, wherein they switch to LED products. As a result, the sales of LCD products fall dramatically. This is a conventional cannibalization example.

Cannibalization is defined as the loss in sales of existing products caused by the introduction of new products. The launch of new products causes no rise in the company’s revenue despite the sales caused by new products.

Cannibalization Rate Calculation

As an umbrella term, cannibalization rate is the percentage of new product sales that replace the existing product sales. This is an important indicator of sales and marketing. Sales managers commonly use this concept to understand the performance of their products, measure the revenue, and design their sales strategy.

Cannibalization Rate is calculated by dividing the new product sales that replace existing sales by total new product sales.

Cannibalization Rate = Total Loss In Existing Product Sales / Total New Product Sales

Causes Of Cannibalization

The main reason for cannibalization is due to the mistakes caused in analysis before the launch of a new product. This could be in the form of pricing, features, or attracting the existing customer base.

• Pricing – When the pricing of the new product is not carefully determined, it can take away the limelight from the existing product. This particularly happens when there is not much deviation between the new and existing products. This leads to cannibalization.
• Attracting Existing Customers – The new product is launched with the mindset to bring in new customers. However, if the product attracts only the existing customers, a cannibalization effect takes place.
• Features – The new product should be completely unique and not clash with your existing product. If it gives an option for your existing customers to select the new product, this leads to revenue loss in current products.

Methods To Prevent Cannibalization Effect

Companies can take measures prior to the launch of new products to prevent cannibalization. By taking these precautions, companies can introduce new products without affecting the marketing value of their old products.

Assess The Target Audience

To prevent deterioration in the market revenue of existing products, companies must clearly analyze the current market, assess their target audience, and then, initiate the product launch. If your product team understands the target audience and is clear that this product does not affect the existing product sales, you can easily avert the possibility of the product attracting your existing customers.

Analyze The Feature Difference

Before launching a new product, the product development team should analyze and compare both the new and existing products’ features. If the existing product has even the smallest possibility of replacing the existing product, and you don’t want that, it is advisable to delay the launch, rework the product features and carry out the analysis process again. By this, businesses can prevent cannibalization.

Evaluate The Market

One process that you shouldn’t skip before and after launching your products is market analysis. Thorough research prior to launch ensures that the product doesn’t compete with your own products. Similarly, analysis after the launch is a checks and balances process where you can instant actions whenever the sales of current products are decreasing due to the presence of new products.

CRM Application To Evade Cannibalization

Apptivo CRM is the best customer relationship management software to manage all your customer relations. The intelligence dashboards available in each app like the Customers app, Contacts App, Leads App, and Opportunities App assist your teams to understand your target audience better at every stage of your sales cycle.

When you have a proper dashboard that measures the analysis in real-time, your teams can effortlessly measure the stats. By utilizing online CRM management tools, your sales and marketing teams can obtain the required data, compare the products, and prevent the effects of cannibalization.

Furthermore, the Customer CRM Software of Apptivo records every interaction with the customers. With this, your sales team will have a common idea of their current customer market. Thereby, they can easily predict the type of characteristics that should be excluded for their new products.

Apptivo Customer Relationship Management Software helps your sales and marketing teams to manage the data, track the performance, and analyze the stats based on key performance indicators (KPIs).

Moving to the next level, companies can also calculate the current revenue and predict the expected revenue based on their customization. With this, sales managers can distinguish how a certain product can affect the revenue generated from new products. As an aftermath of product launch, the sales team can modify their dashboards to compare the rise or drop in sales according to the business purpose to avoid the damage caused by the sale of new products.

Conclusion

Though some companies prefer deliberate cannibalization to encourage their customers to move from their existing products and switch to new products, it is recommended to analyze how the presence of new products will either make or break their business. For this, the right CRM application like Apptivo is needed to identify the cannibalization effect based on authentic metrics.

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