If left unmanaged, cannibalization poses a number of financial risks to retail companies; with a name like cannibalization, it’s not generally framed as a good thing. But we’re here to argue that with the right planning, cannibalization can actually act as a profit driver for your business.
Here at Pricefx, after over a decade supporting our customers manage their unique pricing challenges with cloud-native pricing software, we’ve observed cannibalization to come up again and again as a leading concern among our clients in retail. To that, we’d like to challenge our customers to view cannibalization not as a threat, but as an opportunity.
In this article, you’ll learn how to approach cannibalization strategically, including what cannibalization is and strategies to both avoid unintentional cannibalization and take advantage of intentional cannibalization.
Introducing Cannibalization: What Is Cannibalization in Retail?
Cannibalization happens in retail when a product moves consumer attention away from an older or similar product, eating into the sales of the original product. The most common examples of cannibalization include:
Cannibalization between similar products
Cannibalization between multiple storefront locations in one area
Cannibalization between channels (e.g., brick and mortar vs. online)
Cannibalization is not a monolith; it exists in various forms in the retail space and has varying degrees of relevance for the different groups interacting with it.
Let’s use an assortment of 60, 70, and 80-inch screen TVs to illustrate different levels of cannibalization.
Product-level cannibalization: A category manager, who is normally responsible for aligning the product assortment, prices, and purchasing conditions, will think about cannibalization most in situations at risk of product cannibalization, in this case when there’s internal competition between those 60, 70, or 80-inch TVs, as this concerns a possible cannibalization of their own assortment.
Brand-level cannibalization: That same assortment of TVs experiences cannibalization not only between products, but also across a retailer’s brand offering. Within the same product type (e.g., a 60-inch TV), a Samsung-loyal consumer will go for the Samsung TV, and the same can be said for a fan of Phillips. However, without brand loyalty, a consumer is naturally more inclined to just choose the cheapest option when multiple brands offer a product with the same attributes.
Channel-level cannibalization: Finally, that company’s flatscreen TV offering will also experience cannibalization between channels, as consumers have the choice to buy the same product in the brick-and-mortar store, on the store’s official website, or from an array of third-party online retailers.
Simply put, whenever consumers are offered choices, there will be many opportunities for cannibalization.
Is Cannibalization Harmful?
Yes and no. Cannibalization is often regarded as harmful in retail because internal competition for consumer attention between products or channels always runs the risk of profit loss.
While this may be true when cannibalization is the unintended consequence of poor design, for example from a lack of strategy when planning prices across channels or your product mix, cannibalization can also be beneficial to companies if they intentionally use it to their advantage.
How to Avoid Unintentional Cannibalization
As mentioned, cannibalization is most damaging when your company hasn’t adequately planned for it. With that in mind, here are a few best practices to prevent unintentional cannibalization from eroding your bottom line.
Align pricing within a product family
When setting your prices, you’ll need to make sure that similar products, such as sibling products (products that offer the same thing but have one distinguishing feature, like flavor or color), are priced in the same way to avoid pushing consumers toward the most favorably priced product for them. As long as there is no additional perceived value for the customer, it wouldn’t make sense to differentiate the price for chicken, beef, and chicken flavors in the same food product group.
If the prices within a product family vary, for example when a dog food company offers 15 kg,2×15 kg, and 3×15 kg bags of dry dog food at online checkout, there needs to be a structure in place to reward consumers for buying more, incentivizing their loyalty. In this case, that could look like discounting the price per kilo as the bag size goes up, which the below illustrates:
Align pricing across sales channels
There should be minimal variability in the prices you set for the same product in your brick-and-mortar stores and affiliated websites.
If this isn’t standardized, consumers will easily pick up on the cheaper deal and take advantage of it, cannibalizing sales from other channels in the process. Even when you intentionally set different prices, for example when you have too many products in stock, aligning channel pricing is still necessary if you’d like to incentivize your customers to go towards a specific channel.
Having a strong channel strategy is important in pricing once you bring third parties into your sales channels. When your business widens its digital footprint and uses alternative channels like Ebay or Amazon, you’ll need to make sure your consumers are just using these sites as another search engine – not as a negative incentive for lower prices. Keep in mind that you’ll need to factor in the added cost of exposure into that calculation.
Here’s an example of price harmonization across channels for the Philips EP3243/50 coffee machine:
It is worth noting that prices don’t always need to be consistent across channels; with larger retailers that take up most of consumers’ purchase research, such as Amazon, it is perfectly reasonable to have higher prices, as consumers are less likely to compare them against other retailer prices. The same logic would not be applicable for more transparent sales channels.
Communicate value across your product mix with product differentiation
Consumers are automatically incentivized to choose the cheapest option if they believe it’s a good deal (i.e. they’re getting more value for the price), which cannibalizes sales from the products at more profitable price points. This natural inclination of the consumer to head straight to the low end can be avoided by ensuring that there are value propositions across all of your products.
Differentiating products at different price points by varying their features, quantity, or quality, among other strategies for communicating value, leads your consumers to believe they’re getting a better deal with more midrange products and lessens the likelihood of defaulting to the cheapest option.
Use analytical tools to calculate risk of cannibalization
At the most basic level, you should understand when cannibalization is happening, or could happen, to do anything about it. To do this, you’ll need the right data and tools to identify which products might be at risk of cannibalizing due to similarities or dependencies between them. Pricing software can help here, especially if you have an extensive product portfolio to manage; depending on how sophisticated your needs are, pricing setting and price optimization solutions may be good places to start.
Why Cannibalization Is a Good Thing
Cannibalization isn’t going anywhere, so it’s important to know how to use it to your advantage. Here are a few ways your retail business benefits from cannibalization.
It’s an important mechanism to influence willingness to pay
If set up well, offering your consumers alternatives can be a tool to drive consumers to unwittingly pick the most profitable product in that assortment. One way to achieve this is through price anchoring, a psychological technique in which products in an assortment are priced strategically to influence the consumer’s perception of the value of a product, and by extension their willingness to pay, resulting in a preference for the most profitable product.
While companies knowingly cannibalize their own sales by offering several choices to the consumer, they offset that risk by using their less profitable products as a backdrop to position a specific product as the best choice in the mind of the consumer.
To offer an example, imagine you’re choosing between three coffee machines from the same brand. On the lowest end, there’s an entry-level model priced at 500 EUR, a 900 EUR model, and a 2500 EUR model. In this scenario, it’d be unreasonable for you to choose the cheapest model; although it has all the features you’re looking for, you believe you’re getting less value with the cheapest model than if you spent a little more on a midrange model.
This kind of rationalization of purchasing decisions, where the consumer ties a product’s perceived value to how its price measures up to other prices, can’t happen if there are no other alternatives to contextualize it.
It allows you to take up more market share
If your company decides to add something new to its product line that resembles an existing product, for example, introducing a healthier mayonnaise alternative to your condiment assortment, it inevitably causes some cannibalization of its existing mayonnaise. However, in the process, you’ll gain market share by appealing to a new consumer base you otherwise wouldn’t have accessed. Product cannibalization is a small price to pay for being among the bigger players on the market.
It’s a way to move products profitably
Cannibalization is also a strategy used often to reduce overstock at a high rate of profitability, especially in instances of supersession in which one product is meant to replace another (e.g., selling off the PlayStation 4 at a discounted price to make space for the PlayStation 5). The incentive driving sales in stock-clearing events like Black Friday is the consumer’s assumption they’re getting a good deal – which is rarely actually the case – and that comes from the way prices of overstock items are positioned relative to the new items.
On the other hand, if one item in your product assortment goes out of stock, reducing the number of options available to the consumer and throwing off your original incentivization structure, you’ll need to readjust the prices of the remaining items to still encourage consumers to go for the more expensive option.
Manage Cannibalization Strategically with Pricing Software
Cannibalization isn’t inherently a bad thing; it’s a natural consequence of having more than one product in your offering. And unless you take away a consumer’s ability to choose, you can’t get rid of it.
In other words, the right approach isn’t to avoid cannibalization altogether, but to build the right incentivization structure to guide consumers to the best choice for them (and the most profitable choice for you).
Having the right data and pricing tools can help you get there. To find out how price management software works for you to approach cannibalization more strategically, such as managing product families and aligning your pricing across products, consider checking out our complete guide below.
Jochen Schmidt has over a decade of experience in strategy consultancy and advisory in addition to pricing and software. Over 7 years with Pricefx, he held several positions including Solution Strategist Manager for the EMEA region and spearheading the global retail industry team as a subject matter expert. Throughout his career he has held various positions at specialized consulting companies, providing value to clients by advising on pricing strategies and implementing pricing software. In his free time, he is a passionate cook, beach volleyball and volleyball player, spending most of his vacations travelling and hiking.