It a business context, it's the idea that a lower priced product might eat away at the market of a higher priced one
Posted on Harvard Business Review: February 18, 2011 9:57 AM
Cannibalization. It's an awful word, isn't it? When it gets thrown around in business contexts, people don't stop to think about its origins. The online etymology dictionary (there is a website for everything!) traces the word traces back to Christopher Columbus' description of a tribe in Caribbean that was believed to eat human flesh. Nasty stuff.
It's a critical topic for many companies. I bet many readers have had a project shut down or seriously altered because of corporate fears of cannibalization — the idea that a lower prices product might eat away at the market of a higher priced one.
It's not that the fears are ungrounded. After all, what company would want to replace a high priced product with a low priced product? That's a good way to end up on the corporate chopping block.
But companies must come to grips with their cannibalization concerns, because getting overly defensive can curtail powerful growth strategies.
The topic came up on the panel I moderated in Singapore the other week. Shamik Desgupta, the head of Medtronic's CRDM division in Asia, noted how he has to deal with a strange but real challenge: Medtronic's core business is, well, amazingly profitable. The company's gross margins are around 75% and its net margins after taxes are about 20%. Almost anything looks bad in comparison.
So how do you combat cannibalization concerns? Three ideas emerged from the panel discussion.
1. Find ways to turn the threat into an opportunity. One of the easiest ways to do this is to find someone who isn't consuming because existing solutions are too expensive or complicated. There probably isn't a clearer recent example of this than Apple's iPad. I noted when the product came out one concern could be that analysts would complain about how it ate away at Apple's higher priced computer offering. As Chief Operating Officer Tim Cook noted in Apple's recent analyst call, there did appear to be some of that going on. But that effect was more than offset by Apple using iPad to introduce people to its products. And of course, selling 15 million iPads and producing $10 billion in revenue doesn't hurt. "If this is cannibalization," Cook quipped, "it feels pretty good."
2. Make sure you are doing something legitimately different. If all you are doing to win in a more price sensitive market tier is chopping price, you deserve the fate you receive. One mantra that Procter & Gamble follows is "delight, don't dilute." P&G's VP for R&D in Asia Maurizio Marchesini described how the company successfully introduced a custom-created laundry brand in India called Tide Naturals. It's a unique product that's attuned to the needs in the market. P&G Asia President Deb Henretta also noted how you have to make sure you have a go-to market and marketing approach that's appropriately different. If you use the same marketing vehicles and distribution arms it's hard to bring new benefits to different customers.
3. Remember, cannibalization isn't really in your control. Whether due to Adam Smith's invisible hand or Joseph Schumpeter's gales of creative destruction, if an opportunity is large enough, someone is going to find a way to realize it. Wouldn't you rather it be you who seizes the opportunity than a competitor?
Cannibalization is a real concern. But the right framing and the right strategic approach can make sure it doesn't stop the pursuit of high-potential growth strategies.