Oh no! Cannibalization doesn’t seem like good news for your business, does it?
The article discusses strategies to avoid market cannibalization, which occurs when a new product or service reduces sales of a company’s existing offerings. Key strategies include:
- Market Segmentation: Target different segments with unique products.
- Product Differentiation: Ensure products have distinct features.
- Innovation: Continuously develop new offerings.
- Pricing Optimization: Use varied pricing tiers.
- Effective Communication: Clearly convey product differences to customers.
For franchisors, it also emphasizes managing geographic cannibalization by monitoring overlapping trade areas and sales data. Discover how to do it with Smappen!
Let’s dive into this topic and see how to monitor and prevent this effect from happening.
What is market cannibalization?
Market cannibalization occurs when a company’s new product or service takes sales away from its existing products or services. This can be detrimental to the company’s overall profitability and can reduce customer loyalty.
That’s unfortunate 😵💫
So, how to avoid market cannibalization?
Here are some ways to avoid market cannibalization:
1. Segment your market
Identify the different segments within your market and create products that are specific to each segment. This ensures that you are not selling the same product to different segments, thereby reducing the chances of cannibalization.
2. Differentiate your products
Create products that are distinct from one another in terms of features, benefits, and pricing. This will make it more difficult for customers to switch from one product to another.
3. Focus on innovation
Continuously innovate and develop new products that meet the needs of your customers. This will help you stay ahead of your competition and reduce the risk of cannibalization.
4. Optimize your pricing
Offer different pricing tiers for your products that cater to different customer needs. This will enable you to capture a wider range of customers without cannibalizing your existing sales.
5. Communicate effectively
Communicate the benefits of your products clearly to your customers. This will help them understand how each product is different and why they should choose one product over another.
Those are some helpful tips to consider.
But for franchisors or integrated networks that have several points of sales to deal with in a territory, cannibalization means geographic cannibalization!
Territory management, what is cannibalization?
The phenomenon occurs when the trade areas of two or more of your franchisees or stores overlap and lead to internal cannibalization of your brand’s sales. This cannibalization is not always a sign of disaster for the durability and good functioning of your brand.
However, you should definitely keep an eye on it.
How to spot a cannibalization effect between my stores?
It’s important to be able to identify cannibalization zones and regularly monitor them by reviewing customer data and sales of the relevant points of sale.
Here are a few steps you can take to identify areas of overlap and monitor cannibalization zones:
1. Identify areas of overlap
To quickly identify cannibalization zones, use mapping software to visualize your network. Draw or import the catchment areas for each of your existing sales outlets. Do any of these areas overlap? If so, they are cannibalization zones that need to be analyzed and monitored.
2. Compare sales figures
To determine the impact of cannibalization on your sales, compare the estimated potential turnover from your location study with the actual sales figures. Are your actual sales significantly lower than the estimated potential?
You can also compare the sales figures of the outlets affected by cannibalization zones with the sales figures of your other outlets. Are these outlets underperforming compared to the average sales figures of your network?
3. Visualize customer data on a map
If you have a CRM file with geographical data on your customers (where they live, or in the case of B2B, where they work), mapping this data can give you visibility into the impact of cannibalization. Use this information to adjust your strategies and avoid cannibalization between your points of sale.
With a mapping solution, you can import this customer data to see where your customers are clustered.
- Are they in the trade area you thought?
- What percentage is in the trade area? And outside?
By analyzing sales data, you can determine the percentage of customers in the cannibalized area. Additionally, you can identify “volatile” customers who purchase from both point of sale A and point of sale B, and cross-reference this data with the turnover they bring in to calculate the percentage of your store’s total sales they represent.
If the results are not concerning, continue to monitor them to prevent any potential deterioration.
However, if performance is significantly lower than expected and a high percentage of customers are volatile, it may be necessary to consider the cannibalization effect as a danger to the sustainability of your outlets and brand.
How to address the cannibalization issue?
To address the cannibalization issue, there are two possible solutions.
- The first is to segment customers for each point of sale and offer different promotions, offerings, and marketing strategies to allocate sales.
- The second, albeit more difficult, is to close one of the point of sales or relocate it to avoid overlapping areas. If you choose the second option, you will need to conduct a thorough analysis of the territory to find the best location.
We hope this blog post has provided valuable insight and strategies to help address cannibalization. Cheers!
