Picture this: You're a thriving e-commerce seller in the UK, renowned for your bestselling smart kettle. To tap into the latest trends, you introduce a new version with voice control - the perfect update to your product range.
Now, your customers can adjust the temperature of their kettle, order refills, and manage settings from anywhere in the house - all with just a few simple voice commands!
Before long, you notice something alarming - while the sales for the voice-controlled kettle soar, the sales for your original bestseller plummet. The net gain? Minimal. In the quest to innovate and diversify, you've inadvertently taken a bite out of your own success.
Welcome to the world of market cannibalization. It's not just about introducing new products or services; it's about understanding the impact of those new introductions on your existing lineup.
In a fast-moving market, it's easy to lose track of how each product affects - and is affected by - the others. That's why it's important to have a strategy for managing market cannibalization before you take the plunge.
What Is Market Cannibalization?
Market cannibalization, often just referred to as 'cannibalization' in marketing circles, occurs when a company's new product eats into the sales of one of its existing products.
While innovation and expansion are pillars of business growth, there's a delicate balance to strike. Without proper strategy and foresight, introducing new offerings can sometimes diminish the market share of tried-and-true products rather than growing the overall pie.
For e-commerce sellers, this phenomenon can be particularly significant. The online market allows for quick and agile product introductions, but it's also where customers are flooded with choices. The convenience of online comparisons means that even a slight change in one product can significantly shift consumer preference.
Apple is a prime example of this. The company is constantly cannibalizing its own product line, often replacing one model with a newer version that offers only incremental improvements. This proactive cannibalization ensures that they always stay ahead of the competition and keep their customers engaged.
As Steve Jobs famously said, “If you don't cannibalize yourself, someone else will" eCommerce sellers would do well to take this advice to heart!
Types of Market Cannibalization
Market cannibalization isn't just a uniform occurrence. It can manifest in various ways, depending on the nature of products, marketing strategy, and external market forces. Let's delve into some of the common types that e-commerce sellers might encounter:
The most straightforward form, this occurs when a new product directly competes with an existing one in your lineup, as illustrated with the smart kettle example earlier. This might happen when there's a newer version, a different size, or a variation in features.
This type emerges when products are discounted, either through promotions or sales. While the reduced price can boost discounted product sales, it may also diminish the sales of similar, full-priced items in your range.
For instance, if you offer a significant discount on a specific style of shoes, customers might opt for them over a newer style that's at a regular price.
In the age of multi-platform selling, this form is becoming increasingly prevalent. It takes place when sales from one platform eat into the sales from another.
Let's say you introduce your products on a popular marketplace while still selling on your own e-commerce website. The visibility on the marketplace might decrease direct traffic and sales on your proprietary site.
Relevant for sellers who cater to multiple regions or have both online and physical stores. If you open a new brick-and-mortar store close to an existing one or start targeting the same product to neighbouring regions online, you might find the sales in the original location declining.
This occurs when the sales of a product vary significantly depending on the time of year, promotional periods, or product life cycles. For instance, launching a new summer collection in early spring might lead to reduced sales of the remaining winter stock.
The Risks and Potential Benefits of Market Cannibalization
While 'cannibalization' might seem negative, it's not always bad for sellers. There are times when letting cannibalization occur can be a strategic choice. Before delving into preventive measures, let’s look at the risks and the potential upsides.
- Eroding Profit Margins: One of the most apparent risks is the erosion of profit margins, especially if the new product is priced lower or has higher production costs than the existing one.
- Brand Confusion: With overlapping products or services, customers might become uncertain about which one best suits their needs. This confusion can dilute brand messaging and perception.
- Operational Strain: Managing inventory for two products that compete with each other can lead to operational challenges, including stock management, logistics, and forecasting issues.
- Investment Loss: If a new product takes a bite out of an existing one's sales without offering a significant net gain, you could risk not recouping your investment in product development and marketing.
- Fending Off Competitors: Introducing a product that competes with your own might prevent competitors from filling that niche. Essentially, it's better for you to cannibalize your own sales than for a rival to do so.
- Catering to Diverse Customer Needs: Different versions of a product can cater to varying consumer preferences, helping you capture a broader audience.
- Phasing Out Older Products: Intentional cannibalization can be a strategy to shift consumers from an older, perhaps less profitable product to a newer, more profitable one.
- Learning & Innovation: Sometimes, you can gain valuable insights about the market and customer preferences, even if the new product cannibalizes sales. This feedback can be vital for future innovations.
In essence, while market cannibalization presents challenges, it's not without its silver linings. What's crucial is being aware, intentional, and strategic about how and when it occurs in your business operations. When you can strike a balance between the risks and potential rewards of cannibalization, you can increase overall profitability and grow your business.
Strategies to Minimise Market Cannibalization
Understanding market cannibalization is crucial as you navigate the waters of product innovation and expansion. But fear not: there are some steps and strategies you can take to minimise any potential risks associated with cannibalization. Here are six key strategies:
1. Always Do Your Market Research
Before launching a new product or service, undertake comprehensive market research to gauge potential demand and the risk of cannibalizing existing sales. This can give you insights into whether the market genuinely needs another product or if you're simply dividing your existing customer base.
2. Get Clear On Your Positioning
Differentiate your products in such a way that they appeal to different target audiences or solve distinct problems. For example, one version could be a basic, affordable option, while another could be a premium, feature-rich alternative. This can help you avoid competing products being too similar and stealing each other's customers.
3. Focus On Segmentation & Targeting
Once you've properly positioned your products, use segmentation and targeting to ensure that they're reaching the right customers. For example, advertise the basic version of a product to cost-conscious buyers, while promoting the premium alternative to those who value convenience, quality, and other higher-end features.
4. Leverage Existing Channels
In addition to traditional advertising methods like TV or print ads, use digital channels like email, social media, and search engine optimisation (SEO) to reach new customers.
For example, create a hashtag campaign on Instagram or run an SEO campaign targeted at potential buyers researching your product online. This will help you get your message out to a wider audience and increase brand awareness.
5. Make Use of Pricing Tools
Pricing tools can help you optimise your product's pricing based on factors like market trends, customer preferences, and competitor prices.
You may want to consider tapping into dynamic pricing to adjust prices in real-time based on demand or seasonal changes — for example, raising the price of snow shovels in the winter. Use these tools to maximise profit while remaining competitive in your industry.
6. Test & Measure Results
Finally, measure the effectiveness of your campaigns to track progress and make adjustments as needed. Constantly test new strategies to target customers more effectively and optimise existing campaigns for better results. Use metrics such as click-through rate (CTR) and cost per acquisition (CPA) to analyse the success of each campaign.
Understanding the data allows you to adjust parameters to fine-tune campaigns and increase overall profit. Keep an eye on your competitors as well — if they’re seeing better results with certain strategies, consider adopting them into your own approach.
What Does Pricing Have To Do With Market Cannibalization?
The Influence of Pricing on Consumer Perception
Pricing is not just a tool to dictate profit margins in e-commerce; it's a pivotal influencer in consumer perception and purchasing behaviour. In market cannibalization, pricing strategies can either exacerbate the issue or serve as a remedy.
Introducing a newer product at a higher price can inadvertently cast your existing product in a lesser light. Conversely, pricing a new version too close to the original can drive customers towards the upgraded model.
Segmenting Your Audience through Pricing
Effective pricing can assist in segmenting your audience. Budget-conscious customers might lean towards the basic model with a significant price difference, while those desiring the latest features could be more willing to pay a premium.
Incentivising Older Products
Another route involves incentivising older products. Offering strategic discounts or promotions on previous models can help preserve their sales momentum, which is particularly beneficial if there's significant inventory to move before newer models dominate.
This can also help maintain customer loyalty, as customers may view the discounts and promotions as rewards for their devotion. Customers who might not have been able to afford a more expensive model could now get access to products they ordinarily wouldn't be able to purchase.
Releasing Newer Models Inexpensively
Newer versions of existing products might receive an initial price cut, which would make them more attractive for customers. This could be beneficial in cases where a newer version of a product has been announced but isn't yet available. The lower price can act as an incentive to potential buyers who are waiting for the new version to arrive.
Harnessing Real-Time Pricing Adjustments with BlackCurve
The dynamism in e-commerce allows for real-time pricing adjustments based on evolving customer preferences. Tools like BlackCurve offer insights into how pricing changes impact sales across products. With these data-driven pointers, businesses can adapt their pricing strategies to avoid cannibalization issues.
Beyond automation, you can use pricing solutions to analyse market intelligence, examining competitor pricing and market patterns. This knowledge empowers e-commerce sellers to aptly position their products, reducing self-competition risk.
Don’t fear market cannibalization. Instead, use it to your advantage. With the right strategy and technology in place, you'll be able to take advantage of any scenario and ensure your eCommerce store remains agile and profitable.
Learn more about how BlackCurve helps you stay ahead of the competition - from pricing tools to analytics and optimisation. Sign up for a free trial today.