Cannibalization is generally defined as the negative impact of a company's new product on the sales performance of its existing related products. But is it always bad? Certain types of cannibalization such as introduction of new and improved products are not necessarily undesirable. Knowing that the iPhone would eat into the market share of the iPod would not make Apple stop the release of the iPhone. To quote its CEO, “if we don't cannibalize, someone else will” . However, there are other cannibalization situations which companies generally overlook during sales planning. The costs and benefits of such situations need to be weighed in advance. We will discuss three such types of cannibalization situations one might overlook while planning; techniques to identify them in your ongoing operations and the impact they can have on ones business.
Companies often use multiple channels with overlapping target customer base to sell their products. This may lead to a direct competition between salespeople in these channels leading to cannibalization between channels. The telecom business in India, for example, has company salespeople, independent commission agents and online service providers competing in the same highly competitive market.
Before introducing a new channel, one should analyze costs involved and the net increase in sales it is expected to cause. The net increase in sales must take into consideration the the reduction in sales of other channels due to the cannibalization effect. Additionally, one should also consider readjusting targets of the affected sales force who would face a reduction in sales due to cannibalization because of factors beyond their control.
Another interesting phenomenon that occurs is that marketing spend or promotions in a particular channel has a cascading impact (positive or negative) on the revenue of other sales channels. In the telecom example, a discount offered on online purchase of calling plans can lead to a reduction in sales by in-store reps. Thus, the benefits of channel-specific promotions must not be seen in vacuum as they may have diverted the customers from one channel to another instead of causing an overall increase in sales.
Design of sales compensation plans has a direct bearing on the sales as they drive the behaviour of sales reps who prioritize their activities on the basis of incentives attached to individual products in their selling portfolio. An unbalanced higher incentive on a particular product might increase its sales however might result in lesser selling focus on other portfolio products. Analyzing sales of all products together against time clearly confirms or rejects the presence of this trend. Fig 1 shows an example of the cannibalization effect. Suppose the commission given on the sale of Internet 8Mbps Broadband Product was increased since Feb to boost its sales. While it did lead to increase in its sales, it was at the cost of the other two products. The reps, instead of increasing overall business, shifted their focus towards a more rewarding product. The benefits of the special incentive should thus always be looked at holistically.
Fig 1: High Incentive for selling Internet 8 Mbps plan led to its cannibalizing other plan sales.
Another scenario could be of a FMCG conglomerate which allows its reps to sell personal-care products as well as food and beverages (F&B) items. A decision to increase commissions on personal care products can cannibalize sales of F&B products by altering the selling pattern of reps. It may be difficult to identify the reasons for dropping sales of personal care products since the company might treat different verticals separately and sales executives may not have visibility into sales trends of other verticals. A single chart which shows sales of all product categories a company has can be utilized to identify this effect.
Competing stores of a company in the same proximity cannibalize each other’s sales. Sometimes, expansion into a new territory can lead to a natural drop in sales of the adjoining territories because of some customers switching. Customers might shift due to proximity to the new store, due to differential local tax rates, due to non-uniform promotional offers or due to better facilities (Parking!) in the new store. Starbucks identified this very problem in its business and now uses extensive data analytics before opening a new store to determine the extent of cannibalization it would cause to the existing ones. Figure 2 and 3 show how the sales of adjoining regions may be impacted when a new store opened in a fresh territory.
|Fig 2: Sales when only 4 territories were present||Fig 3: Sales after a store was opened in a nearby territory|
Such territorial changes can either be reported by the field or can be identified from mapping territory level sales data. This may require reassessing the potential of territory and adjusting rep quotas accordingly. Note that in addition to external factors causing changes in a territory’s potential, there might also be a natural reduction in territory’s potential due to market saturation. This is not cannibalization and is observed as a gradual flattening or decrease in territory revenue as opposed to a sudden decrease that is characteristic of cannibalization.
Regular extensive sales analytics can help pre-empt such cannibalization situations and prevent one from being blind-sided by them.
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