Cannibalization
IntermediateCannibalization is the reduction in sales of a company's existing products caused by the introduction of a new product that customers buy instead.
When a company launches a new product, some of its customers may simply switch from an existing product rather than making an additional purchase. The new product "eats into" the sales of the old one.
For example, a drinks company launches a sugar-free version of its popular soft drink. The new product sells 500,000 units a year, but sales of the original drink fall by 150,000 units. The net gain is only 350,000 units.
When evaluating new products, companies should consider cannibalization in their incremental cash flow estimates, counting only the net increase in sales and profit.
Cannibalization is not always bad. If a company does not introduce a new product, a competitor might, taking the customers anyway. Some companies deliberately cannibalise their own products to stay ahead of technological change, as when a company launches a new model that replaces its previous one.
Cannibalization can also occur between sales channels, such as online sales reducing in-store sales, or between locations, such as a new store drawing customers from a nearby existing one.
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