Product Cannibalization

1. Product Cannibalization Sundar Srinivasan

2. Outline Cannibalization Definition Types of Cannibalization Sources of Cannibalization New Product Forecasting Problem Statement Research Objective Boundary Conditions

3. Outline (contd..) Research Methodology Product Classification Preliminary Analysis Cannibalization Model Performance Characteristics Case Studies

4. 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 product’s sales are at the expense of other products offered by the same firm - Copulsky, (1976).

5. 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.

6. Types of Cannibalization Inter-Product cannibalization Example – microwave and oven Intra-Product cannibalization Example – mint and cinnamon toothpaste

7. Sources of Cannibalization

8. New Product Classification Paley (1999) Modification Line extension Diversification Remerchandising Market extension

9. New Product Classification Tauber (1981) New product, Flanker brand, Franchise extension, and Line extension

10. 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

11. 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

12. 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.

13. 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

14. 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

15. 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

16. Boundary Conditions

17. Research Methodology Product Classification Preliminary Analysis Cannibalization Model

18. 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.

19. Product Portfolio Model

20. Product Grid

21. Preliminary Analysis Study product sales trends Identify competition

22. Cannibalization Model

23. Performance Characteristics Absolute volume analysis Market share analysis Market size analysis

24. 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

25. 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

26. Case 1

30. Case 2

35. Case 3

40. 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.