The idea of sales cannibalization in retail is a double-edged sword, neither inherently positive nor negative. On the one hand, internal cannibalization can steal up to 30% of your sales but, on the other hand, it can enhance your market positioning if managed properly.
This article aims to demystify cannibalization by defining its essence and exploring its implications. You will delve into the pivotal question: is cannibalization harmful? The answer will lead you to the complexities of unintentional cannibalization and strategies to mitigate its damaging effects. Moreover, you will uncover scenarios where cannibalization can bring positive outcomes.
Eventually, you will get a comprehensive guide on strategically managing cannibalization to equip you with actionable insights. A key focus will be on leveraging advanced pricing software as a potent tool to navigate the complexities of cannibalization. Let's start!
Introducing cannibalization: what is cannibalization in retail?
Cannibalization in retail can take various forms. First, let’s distinguish internal and external cannibalization.
External cannibalization happens when a new offering from a competitor diminishes the sales of your existing product or service. Since the idea of external cannibalization is more straightforward than internal cannibalization, we will focus mainly on internal cannibalization in the article.
Internal cannibalization occurs within the same brand or company. Let's look at its subtypes:
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Cannibalization between similar products. This effect occurs when introducing a new product within a brand's lineup reduces the sales of an existing product. For example, if a company offers two similar smartphones at different prices, the cheaper option may cannibalize sales of the more expensive model.
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Cannibalization between multiple stores. In cases where a retailer has various storefronts nearby, a new store opening can lead to cannibalization as customers may shift their purchases from existing locations to new ones. Such a dependency is also often called the Halo effect.
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Cannibalization between channels. With the rise of omnichannel retail, cannibalization between different sales channels (e.g., brick-and-mortar stores versus online platforms) has become more prevalent. Customers may choose to purchase from one channel over another, impacting overall sales distribution.
We should also distinguish product-level and brand-level cannibalization retail effects. If a consumer prefers a plain white T-shirt to one with the printed logo of the same brand, it could be an example of product-level cannibalization. Brand-level cannibalization can occur when shoppers choose between two same-look T-shirts by different brands.
Why is retail cannibalization neither harmful nor beneficial
Cannibalization’s impact depends on various factors. While it can decrease sales or market share for specific products or brands, it can also have positive effects. For example, cannibalization can help maintain your overall market dominance by preventing competitors from gaining a foothold.
It can also drive innovation and keep you relevant in a competitive market. However, if not appropriately managed, retail cannibalization can decrease profitability and cause price perception dilution. Therefore, it's essential to carefully assess the effects of cannibalization and implement strategies to mitigate its negative impacts.
How to avoid unintentional cannibalization in retail
Avoiding unintentional cannibalization in retail requires strategic pricing and product differentiation strategies. One approach is to align pricing within a product family. It implies that similar product prices are consistent to prevent consumers from gravitating toward the most favorably priced option. For instance, offering discounts or promo for larger quantities can incentivize customers to purchase more without cannibalizing sales of smaller packages.
As a retailer, you should align pricing across sales channels to maintain consistency and prevent customers from shifting purchases to cheaper channels. You can achieve it simply by standardizing prices between brick-and-mortar stores and online platforms. However, we'd recommend a more sophisticated approach based on providing additional offerings or services. For example, you can offer the same product offline at a higher price but with a free packaging option.
Another effective strategy is communicating value across product lines. By differentiating products based on features, quantity, or quality, consumers are less likely to opt for the cheapest option.
Lastly, it is essential to utilize analytical tools to identify potential cannibalization risks. Pricing software can help analyze data and identify products that may be at risk, allowing retailers to adjust their strategies accordingly. We will elaborate on that in the last part of the article.
Leverage the benefits of cannibalization retail
When strategically managed, cannibalization can benefit retail businesses in several ways. First, offering alternatives within a product range can influence consumers' willingness to pay. Second, through techniques like price anchoring, you can influence the perception of product value and, eventually, guide consumers to buy products with higher margins.
Secondly, retail cannibalization allows businesses to expand their market share. Introducing new products that may cannibalize existing ones can attract new consumer segments, ultimately growing the overall customer base.
Lastly, cannibalization can be a profitable strategy for managing stock and running markdown campaigns. It can help clear out overstocked items by offering them at discounted prices, ensuring a high rate of profitability even when selling off older inventory.
Manage retail cannibalization strategically with pricing software
Effective cannibalization management using pricing software involves understanding explicit or implicit product relationships and using advanced algorithms to predict and optimize pricing strategies. Modern pricing solutions, like AI Pricing Platform Competera, leverage machine learning to process vast amounts of data, identifying implicit connections between product demand and pricing.
Competera platform can analyze cross-dependencies within a product portfolio to predict how price changes might impact cannibalization. By leveraging neural networks and advanced algorithms, the pricing engine can accurately predict the effects of price adjustments on demand and sales, ensuring pricing decisions minimize cannibalization.
The workflow of advanced pricing software typically involves two stages. First, the platform calculates the precise effect of price changes on demand. Then, it uses this data to craft optimal prices for the entire product portfolio, aiming to minimize the adverse impact of cannibalization. If you want to explore Competera more, don't hesitate to contact us.
