Eating Your Own Profits

Market cannibalization is a critical business topic for organizations that are continually upgrading and improving their product offerings.  Investopedia explains market cannibalization with this simple example.   “If a company is practicing market cannibalization, it is eating its own market. For example, say Coca Cola puts out a new product called Coke2, and customers buy Coke2 instead of regular Coke. Although sales may be up for the new product, these sales may be eating into Coke’s original market, in which case the overall company sales would not be increasing.”  So how do you introduce a new product without it negatively impacting existing sales?  There are two important factors to always monitor: Timing and Pricing.

Timing
If customers learn that a new product is coming with more features or addresses problems that exist in the current product, you will inevitably slow down sales.  It can be difficult to control the release of information to the public but try to wait until a month before the product will be available.  This will minimize the impact of people waiting for the latest and greatest.  Apple chooses to announce a product release the day it becomes available and avoids addressing any rumors that circulate about product enhancements.  Because consumers are never sure when the new product will come, they continue buying at the same rate.

How do you know if you have chosen the right time to let the news of a new product out?  Business Intelligence (BI) is often used to monitor product sales (or lack thereof) in a dashboard format.  BI can be set-up with a graph that represents your existing product as well as the new product.  You can see product sales in real-time and know immediately if there is an issue that must be addressed.

Pricing
Pricing strategy involves science as well as art.  Once the costs have been covered and the profit margin determined, marketing must sell your consumers on the product’s value.  Proctor and Gamble has recently released several lines of men’s razors that all compete against one another.  Their latest release, the Fusion ProGlide, is at a higher price point than their existing brand leader, the Mach3.  This commercial for the Fusion ProGlide directly addresses the Mach3 as a competitive product even though they are both P&G brands:

As you review your pricing strategy, understand that you may need to directly compete against your existing brand in order to increase sales of a more profitable replacement.  You can use BI to see if the strategy is paying off.  You can monitor profit percentage daily to see if the new product is beginning to take hold and increase your company’s overall profitability.

Product cannibalization can be necessary as you increase your product offerings and, hopefully, your profit margins.  Monitoring the impact of the strategies you have chosen make it possible for you to react quickly when a change needs to be made.  Business intelligence can give you that visibility to ensure that every product release is a great success.

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