Product Cannibalization

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Product Cannibalization

• Sundar Srinivasan

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Outline

• Cannibalization Definition
• Types of Cannibalization
• Sources of Cannibalization
• New Product Forecasting
• Problem Statement
• Research Objective
• Boundary Conditions

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Outline (contd..)

• Research Methodology
• Product Classification
• Preliminary Analysis
• Cannibalization Model
• Performance Characteristics
• Case Studies

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Cannibalization - Definitions

• The process by which a new product gains sales by
  diverting sales from an existing product -
  Heskett, (1976)
• The extent to which one products sales are at
  the expense of other products offered by the same
  firm - Copulsky, (1976).

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Cannibalization

• Ulrich and Tung (1991) suggest that excessive use
  of commonality could result in products of
  similar nature
• Harvey and Kerin (1979) suggest that as the
  similarity between the attributes of a product
  increase, the probability of the new product
  cannibalizing the existing products in the
  portfolio increases.

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Types of Cannibalization

• Inter-Product cannibalization
• Example microwave and oven
• Intra-Product cannibalization
• Example mint and cinnamon toothpaste

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Sources of Cannibalization

• Competition
• New Products
• Price Changes

• New Products
• New package
• Line extension
• New product

Market Trend
Cannibalization Factors
Price Elasticity

• Marketing
• Market Extension

• New Products
• Intro of NP at Cost
• Promotions
• Marketing

• Existing Products
• Price Changes
• Marketing

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New Product Classification

• Paley (1999)
• Modification
• Line extension
• Diversification
• Remerchandising
• Market extension

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New Product Classification

• Tauber (1981)
• New product,
• Flanker brand,
• Franchise extension, and
• Line extension

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New Products

• Increase market share
• Kim and Chhajed (2000) suggest using commanlity
  to reduce
• Design costs
• Manufacturing costs
• Buday (1989) also suggest increased
  line-extensions to increase market share
• More than 70 of new products are line extensions

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New Products Forecasting

• Most difficult and critical tasks Mahajan and
  Wind (1988)
• Political and economic factors and competition
  add to the complexity Mahajan et al (1981)
• Assumus (1984) suggests using combination of two
  or more forecasting techniques to reduce errors
• Hogarth and Makridakis (1985) support this

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Need for Cannibalization Models

• Kerin et al (1978) stress the importance of
  studying the effects of cannibalism and the
  adverse effects if products performance is
  examined as an isolated approach.
• Chen and Yu (2000) advise on the adverse effects
  of ignoring the effects of cannibalization.
• Carpenter and Hanssens (1994) discuss the
  importance of predicting cannibalization effects
  and the difficulties involved in doing so.
• Mason and Milne (1994) suggest that
  identification of cannibalization rates is a very
  important factor in making strategic decisions.

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Existing New Product Models with Cannibalization
Effects

• Silk and Urban, 1978
• Shocker and Srinivasan, 1979
• Burger et al., 1981
• Yankelovich, Skelly and White, Inc., (1981)
• Moorthy and Png, 1992

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Problem Statement

• Unique data collection techniques
• Measure only levels of cannibalization, not
  effects
• Cannot measure the level and/or effects of
  cannibalization as a continuous issue
• Cannibalization value from judgmental techniques
  which are not very effective

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Research Objective

• Develop a methodology to identify cannibalization
  and its extent
• Develop a framework that helps predict the impact
  of cannibalization on product portfolio
• Statistical analysis of the introduction of the
  new product

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Boundary Conditions
Cannibalization - New Product Introduction
Worst Case Scenario Draws sales from products
in portfolio, no change in companys market share
Ideal Scenario Increases overall market share,
from new and competitions customers
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Research Methodology

• Product Classification
• Preliminary Analysis
• Cannibalization Model

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Product Classification

• Product Identification
• Attribute Definition
• Brand identifies the manufacturer of the
  product.
• Family Each brand has one or more product
  families. All the products from a brand belong to
  a family
• Product Group defines the sub category of the
  product within the family
• Product defines a particular product within a
  product group. It also contains information about
  the size of package, volume of package and the
  type of package.

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Product Portfolio Model
Brand
Product Groups
Product Families
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Product Grid
Increasing Market Volume
Increasing Product Price
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Preliminary Analysis

• Study product sales trends
• Identify competition

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Cannibalization Model
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Performance Characteristics

• Absolute volume analysis
• Market share analysis
• Market size analysis

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Assumptions for Preliminary Analysis

• The existing product was not willingly
  cannibalized
• No special promotions for the new or existing
  products
• The sales of the new product and the cannibalized
  product were not affected by competition
• Market trends do not indicate cannibalization of
  the product in preference to another product

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Case Studies

• Analysis for a Product Group Introduced in a
  Premium Family
• Analysis for Multiple Products Introduced at the
  Same Time a Sub-Premium Product Family
• Store-specific Inter-Family Analysis

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Case 1
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Case 2
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Case 3
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Conclusions

• Product cannibalization occurs within the same
  product group and also between families in the
  same brand
• Products of the same package size are
  cannibalized preferably to products of a
  different package size.
• Cannibalization preferentially affects immediate
  neighbors i.e. a new product introduced in low
  priced family affects mid-priced family in
  preference to premium priced family.