Beware the Cannibal In Your Product Line
Kantar Worldpanel predicts that 75% of growth for consumer products companies in the next decade will come through new product development. And yet, more than half of senior executives declare themselves unsatisfied with the financial returns of product innovation. Why? Because their innovation models don't determine where the growth is actually coming from. So, companies end up developing a product that tested well in market research only to find out later that they've got a cannibal on their hands, chipping away at their existing market share.
The value-destroying menace of cannibalisation is the dirty little secret of the innovation industry. Launching a new product that steals a large proportion of market share from a company's existing portfolio is a bad idea. The problem is that traditional approaches to identifying winning innovation don't screen out cannibal products until very late in the process, after significant sums have been spent — and when there is great temptation to ignore the findings of research and push on anyway.
What's worse, the traditional innovation process doesn't just ignore cannibalisation — it can actively favor cannibal products over ideas that would grow a market or a company's share of it. Concept screening, the process of assessing which ideas have the greatest potential, tends to focus on the total trial they would achieve. Judged by these rules, concepts that involve launching a variation of an existing brand tend to do very well, since shoppers respond to a brand they already know. This is why supermarket shelves are often filled with variants of established products. Unfortunately, these types of product launches are most inclined to cannibalism, draining sales from the very brands they had hoped to leverage. For example, the new quadruple-blade razor that's launched under a well-known shaving brand will probably gobble up most of its share from the triple-blade razor that brand was already selling quite successfully. Similarly, the introduction of laundry pods have caused the entire category to shrink, as people now use the correct volume of detergent, whereas overuse was previously the norm.
The seductive power of cannibal concepts becomes even more of an issue when times are tight and the pressure is on for new products that can deliver a return on investment. If that return is initially measured only in terms of total sales, then cannibals start to look like safe bets — rather than the threat to profitability that they so often are. In most cases, sales of new products command far lower margins than those of established brands — which means that the time and effort expended to launch a cannibal can actively erode value across the portfolio as a whole.
It's easy to find examples of cannibal products failing to deliver the benefits that their total sales volume might suggest: our research shows that the launch of Dove deodorant for men has undermined sales of its sister Axe/Lynx deodorant; a great deal of Coke Zero's growth has come at the expense of the existing Diet Coke.
But to understand the full damage cannibals can do, let's look at a slightly older example. Back in 1994, Kodak launched the low-cost Funtime film; only to take it off the market when it stole share from Kodak's existing products. Now, this was bad in and of itself — but imagine if instead of ploughing R&D dollars into Funtime, Kodak had focused on ways to make money from the emerging worldwide web and digital cameras. The big problem with cannibals is that they tend to drown out truly innovative ideas that can have a far more positive effect on a company's fortunes.
So, how do you recognize a cannibal in the concept stages? It starts with focusing on incremental growth, rather than on total sales. My company, TNS, has shown that judging concepts based on incremental growth rather than the traditional "biggest is best" approach results in a different decision on which ideas to proceed with 40% of the time. To weed cannibals out of the innovation process, you need a model that focuses on incrementality from the start; one that has the right techniques and strategies for measuring it — and the right idea development process to deliver it. Here's a quick three-step guide to finding ideas that can deliver genuine growth, rather than growth at your own company's expense:
1. Demand to know incremental volume
Your company doesn't need a new product to deliver a lot of sales — what you need is for that new product to deliver profitable growth. Incremental volume is the only true measure of growth potential. Yet traditional approaches to innovation only address this towards the end of the process, through "share of requirements" analysis that gives an average view of how the new product will affect consumers' existing spend in the category. The problem is that this general overview lacks the precision and credibility to sway investment decisions at such a late point in proceedings, when significant resources have already been invested in a product's development.
2. Analyze individuals, not averages
If you want to measure incremental volume with any accuracy, you need individual-based modelling techniques that take into account the individual spending patterns of each person who will buy the new product, rather than drawing general assumptions from average numbers. As a simple example, the impact of somebody who buys an existing product on a weekly basis and switches about half of their purchases to a new product is far greater than a shopper who buys an existing product only monthly, but ditches it entirely in favor of the new product. Effective individual-based modelling doubles the accuracy of incremental sales predictions when compared to aggregate calculations (see chart).
3. Invest in finding the right ideas, not just developing the ideas you have
Businesses invest considerable sums in developing winning ideas; they pay far less attention to finding the right incremental ideas to develop. Innovation needs to be guided by an integrated understanding of customer needs, the competitive landscape, and a tried-and-tested approach, identifying the area where a winning concept is likely to be found and exploring that area with creativity and imagination.
With all of that said, cannibals can have their uses. Where an existing product is under threat, a carefully-designed cannibal can help to protect the bottom line. The iPad mini is a great recent example: in the context of the Kindle Fire and other smaller, cheaper tablets, it's an understandable attempt to protect Apple's overall market share.
Cannibals, therefore, aren't always bad news. But the situations in which they can be valuable are very specific — and demand a precise understanding of how the new product will affect consumers' spending. If you are intentionally planning to launch a cannibal, you need an even deeper understanding of incrementality.
Don't risk letting cannibal concepts hijack your innovation process. In complex markets and with intensifying pressure on innovation to deliver results, you simply can't afford to turn a blind eye.