In marketing, the term "cannibalization" refers to a new product eating into the profits of a current product from the same company. It's a fairly common business strategy, and while the idea of cannibalizing your own product sounds bad, it can actually be a successful business practice. In 2010 for example, when Apple introduced the iPad, it took sales away from the original Mac computer. However, the iPad ultimately led to an expanded market for consumer computing hardware and was quite a successful venture for Apple.
Calculate the cannibalization rate by dividing the sales loss of the existing product by the sales achieved for the new product.
How to Calculate the Effect of a Cannibalization Rate
As you might imagine, it can be difficult to predict how much a new product will cut into the sales of an existing product. But there is a formula that will give you an estimate.
Cannibalization Rate = Sales loss of existing product / Sales of the new product
That sounds a bit confusing, so let's look at an example. Suppose a company that sells sunglasses (S) for $10 launches a new line of polarized sunglasses (PS) for $15. The company sells 70 PS and the cannibalization rate is 60 percent. This means that 60 percent of the new product’s sales are taken from the existing product (S). So we can use the cannibalization rate to calculate the sales loss of the existing product.
60% of 70 PS = 42
This means the sales of existing product S will be decreased by 42 from its current sales. Before launching the polarized sunglasses, the company sold 80 regular sunglasses. This means sales of S after launching PS will be:
- 80 – 42 = 38 S
- Sales of the existing product after cannibalization = 38 S
- Sales of new product = 70 PS
- (38 units x $10) + (70 units x $15) = $380 + $1050 = $1430
Without introducing the new product (PS) total sales would have been: 80S x $10= $800. So despite the cannibalization rate of 60%, the new product brought the company a profit of $630. In this situation, the cannibalization rate did not negatively affect sales, but it can have a negative impact depending on several factors, including the price to make the new product and the final sales price of the new product.
Know the Break Even Cannibalization Rate
If a company is considering the introduction of a new product, the potential for cannibalization is a key factor to consider. The amount of cannibalization should be estimated beforehand. Companies need to know the maximum they can allow for its new product to cannibalize its old product. That maximum cannibalization rate is called the Break Even Cannibalization Rate or BECR.
The BECR refers to the cannibalization rate at which the losses incurred by the company due to a decrease in sales of the old product is equal to the gains made by the company from the new product sales. Losses will occur if the rate goes beyond the BECR, and profits are made if the cannibalization rate is less than BECR.