Market cannibalization, also known as sales or business cannibalization, refers to a situation where a new product introduced by a company eats into the sales of one of its existing products. This typically occurs when the new product is similar to an existing one, and customers start buying the new product instead of (or in addition to) the existing one.
This can lead to a reduction in market share, sales volume, and revenue for the existing product, which is why it’s referred to as “cannibalization.” Market cannibalization is often an unintended consequence of a company’s growth strategy, although in some cases it may be an intentional strategy.
For instance, a company may choose to introduce a new product that’s likely to cannibalize an existing one if it believes the new product will ultimately lead to higher overall market share or if it wants to pre-empt competitors from introducing similar products.
While cannibalization can negatively impact individual product sales, it doesn’t necessarily mean a net loss for the company as a whole, especially if the new product is more profitable, reaches a new market segment, or helps the company to maintain or grow its overall market share.
It’s important for businesses to consider the potential for cannibalization when launching new products and make strategic decisions that will optimize their overall product portfolio and market position.
Example of Market Cannibalization
Let’s consider a classic example: Apple’s introduction of the iPhone.
Before the iPhone, one of Apple’s best-selling products was the iPod, which dominated the market for portable music players. However, when Apple introduced the iPhone—a smartphone with the capability to store and play music just like an iPod—it inevitably led to a decline in iPod sales.
In this scenario, the iPhone cannibalized sales of the iPod. Customers who might have bought both an iPod and a separate mobile phone instead chose to buy just an iPhone.
However, it’s important to note that this was likely an intentional strategy by Apple. The company could foresee the trend of convergence in digital devices (that is, single devices incorporating the functions of several previously separate devices). By introducing the iPhone, Apple was able to stay ahead of this trend and capture a significant share of the growing smartphone market.
While iPod sales declined, iPhone sales grew massively and quickly offset any lost iPod revenue. The overall effect for Apple was positive, as it helped the company become a dominant player in a new and rapidly expanding market.
This example illustrates how market cannibalization, while it may appear negative in terms of the sales of a single product, can be part of a successful broader business strategy.