What it means
In business, companies often introduce new items to capture market share, reach different audiences, or block competitors. However, if your new product is too similar to what you already sell, loyal customers will simply switch over.
This means you are paying to produce and market a new item while losing the steady sales of the old one. For non-finance managers, understanding this concept is vital when approving new product budgets.
You must look beyond gross sales forecasts and calculate net gains. If a new launch generates $10,000 in revenue but causes an $8,000 drop in your flagship product sales, your actual net gain is only $2,000.
Revenue is only half the story, because the new and old products rarely earn the same margin. If the product being cannibalised is more profitable than the new one, the company can grow sales and still lose profit.
Finance teams therefore compare the contribution (selling price less variable costs) of the new product with the contribution lost on the old one. In practice, companies weigh the risks of internal competition carefully.
Sometimes, cannibalisation is a deliberate strategy. If you do not launch the new product to steal your own sales, a competitor will do it for you.
The key is ensuring that the long-term strategic benefit outweighs the short-term margin dip. Imagine you own a popular local burger van and decide to open a second burger van right next door.
You might attract some new foot traffic, but many of your regular customers will simply queue at the new van instead, meaning you just split your existing crowd.
In practice
Real-world examples
Example 1
A smartphone maker launches an advanced model priced at $800. Sales of its previous $600 model drop sharply as buyers upgrade to the new version. Revenue per customer rises, but if the newer phone costs much more to build, total profit margins can fall.
Example 2
A local bakery introduces artisan sourdough loaves. Regular customers stop buying the standard white bread and shift their spend to the new sourdough. Daily revenue stays almost unchanged, but the bakery has added a more labour-intensive product for no extra sales.
Example 3
A software firm releases a cheaper mobile app version of its desktop software. Many corporate clients downgrade their expensive desktop subscriptions to save money, reducing the company's average revenue per user. The firm must then win enough new customers to make up the lost subscription income.
Think of it
Imagine you own a popular local burger van and decide to open a second burger van right next door. You might attract some new foot traffic, but many of your regular customers will simply queue at the new van instead, meaning you just split your existing crowd.
Formula
Calculation
Net Revenue Gain = New Product Revenue - Lost Revenue from Existing Products
Cannibalisation Rate = (Lost Revenue from Existing Products / New Product Revenue) x 100
Net Profit Gain = (New Product Revenue x New Margin) - (Lost Revenue x Old Margin) - Launch Costs
Worked example. A company launches a new product that earns $50,000 in revenue, while sales of an existing product fall by $30,000.
- Net Revenue Gain = $50,000 - $30,000 = $20,000
- Cannibalisation Rate = ($30,000 / $50,000) x 100 = 60%
- The new product earns a 30% margin: $50,000 x 30% = $15,000
- The old product earned a 40% margin: $30,000 x 40% = $12,000 lost
- Net profit gain before launch costs = $15,000 - $12,000 = $3,000
- If the launch cost $5,000 in marketing, the net effect is $3,000 - $5,000 = -$2,000, so the launch lost money despite adding $20,000 of revenueCase study
Seen in the real world
This is a fictional, illustrative scenario. GreenLeaf, a mid-sized beverage company, sold a popular organic juice in glass bottles for $3.50. To appeal to eco-conscious shoppers, it launched the same juice in lightweight cartons for $2.50. GreenLeaf projected that total sales would jump by $100,000.
When the cartons hit supermarket shelves, sales surged. However, financial analysis at the end of the quarter revealed a hidden problem. Shoppers who previously bought the glass bottles simply switched to the cheaper cartons. Glass bottle sales fell by $80,000, while carton sales reached $100,000, so revenue rose by only $20,000.
The cartons also earned a lower margin, 25% of sales against 40% for glass. The company gained $25,000 of margin on cartons but lost $32,000 on glass, so overall profit actually decreased by $7,000. The marketing team celebrated the top-line sales growth, but the finance department noted that the company had effectively paid to shift its own customers to a less profitable format. GreenLeaf learned that understanding customer switching behaviour is just as important as predicting total market demand.
Watch out
Common mistakes
- Assuming all new product sales are entirely new revenue without checking if existing sales dropped.
- Failing to account for differences in profit margins between the old and new products.
- Ignoring the risk of competitors cannibalising your market share if you refuse to innovate.
Questions
People also ask
Is cannibalisation always a bad thing?
No. It can be a defensive strategy to stay ahead of competitors or to transition customers to a better, more modern product line before rivals do.
How can I measure it accurately?
Track sales trends of your existing products immediately following a new launch, and use customer surveys to find out if buyers switched from your older items.
Can services suffer from this issue as well as physical products?
Yes. If a consultancy firm launches a low-cost subscription advisory service, existing clients paying for premium one-to-one consulting might downgrade.