Market cannibalization occurs when a new product intrudes on the existing market for an older product, rather than expanding the company’s market base. Instead of appealing to a new segment of the market and increasing market share, the new product appeals to the company’s current market, resulting in reduced sales and market share for the existing product.
If it is not intentional, market cannibalization can have a negative effect on a company’s bottom line. This forces an existing product’s life to end prematurely because sales shifted to the new product, rather than tapping into a new market as intended.
While this may seem inherently negative, in the context of a carefully planned strategy, it can be effective, by ultimately growing the market, or better meeting consumer demands. Cannibalization is a key consideration in product portfolio analysis.
Cannibalization is an important issue in marketing strategy when an organization aims to carry out brand extension. Normally, when a brand extension is carried out from one sub-category (e.g. Marlboro) to another sub-category (e.g. Marlboro Light), there is an eventuality of a part of the former’s sales being taken away by the latter
EXAMPLE: In India, where the passenger-car segment is going up dramatically since the turn of this century, Maruti-Suzuki’s launch of Suzuki Alto in the same sub-category as Maruti 800, which was the leader of the small-car segment to counter the competition from Hyundai is seen to be a classic case of cannibalization strategy.
Large corporations, such as Proctor and Gamble (P&G) have been using this strategy to help maximize profits. It’s a very basic math model, but the hardest part is figuring out the projected sales for a product that hasn’t existed on the market yet.