Cannibalization is a necessary evil in many industries because it is often the only way to innovate and move forward. Selling the same product or service over a long period of time naturally creates stagnation, or even worse, a decline in sales.
What Is Cannibalization?
If you are not familiar with the term, Cannibalization refers to introducing a new product or service that directly competes with your existing product/service lineup – consequently reducing current product/service sales.
Tech companies often come to mind when thinking about product/service cannibalization, and especially Apple. “If you don’t cannibalize yourself, someone else will” – Steve Jobs. Clearly, Steve Jobs was a big proponent of this strategy. He cannibalized MacBook sales by introducing iPads, and then he capitalized iPads by introducing large and powerful iPhones.
Why Is Cannibalization Necessary?
Many businesses think of cannibalization as an aggressive strategy, and often the last resort, hence why new incumbents regularly disrupt industries. This reluctance by traditional businesses to cannibalized their products/services eventually results in declining sales. Furthermore, they place too much emphasis on cutting costs to somehow try and compensate for the lost revenue.
We have seen this unwillingness to “cannibalize” in many industries. For example, newspapers took decades to move from print to digital, because the print side of the business generated higher revenue at the time. This type of short-term thinking drives many companies and industries into extinction.
Another form of cannibalization is introducing a lower-cost product/service that directly competes with a more profitable product/service. An excellent example of this is a SaaS (Software as a service) business offering a free product/version with limited features. Many of these “free version” customers will never upgrade to a paid version, therefore they are cannibalizing their paid/premium products.
A slightly different form of cannibalization is happening in the auto industry, more specifically with luxury automakers such as Audi, Mercedes, BMW, and Lexus with the introduction of subcompact SUVs. These SUVs are often significantly cheaper and less profitable than traditional SUVs.
Why would luxury automakers push a lower-cost option on customers? One, they are meeting the customer demand for lower-cost, but higher quality SUVs. Two, they are making the barrier of entry lower. Three, these entry-level customers will eventually be persuaded/nudged into higher-priced vehicles. In both examples, the long-term goal is to convert free or low-paying customers into higher-end (more profitable) customers.
Is Cannibalization Strategy Right For Your Business?
If your sales are declining or your market is shrinking, then cannibalizing your existing products/services is an option that should be considered. Cannibalizing declining sales requires courage, so it shouldn’t be a surprise that most businesses choose the easier route and focus on reducing costs.
There is no right or wrong answer here because it really depends on your situation. That being said, easier option is not always the best one.
As we mentioned earlier, cannibalization is a drastic step, so it requires a lot of thought and consideration. And seeking internal and external advice is highly recommended to accurately access risks and opportunities.