New Product Introduction and Cannibalization

 


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In business, cannibalization occurs when a company introduces a new product or service that takes sales away from its existing offerings. Cannibalization can be positive or negative, depending on how profits are affected. Please note, in the nonprofit world, profit is called change in net assets. We use the term profit because it is more familiar to readers.

Consider the following fictitious nonprofit example: Get Financial Ready! is a nonprofit that supports retirement planning from an early age. The nonprofit’s main product is providing financial education through an online newsletter.

Get Financial Ready! sells 100 subscriptions to their Gold Newsletter at $10 per subscription. It costs Get Financial Ready! $2 to compose each newsletter.

Profit = Total Revenue – Total Cost

Profit = 100 Gold Newsletters x $10 per Gold Newsletter – 100 Gold Newsletters x $2 per Gold Newsletter

Profit = $1000 - $200 = $800

Negative Cannibalization

In Negative Cannibalization, the new product reduces overall profits.

Get Financial Ready! introduces a lower cost subscription option, the Sliver Newsletter. The Silver Newsletter has fewer features, is priced at $8 per subscription, and costs $1 to compose. Half of current Get Financial Ready! customers opt for the lower cost Silver Newsletter. The new profit for Get Financial Ready! is a combination of Gold Newsletters and Silver Newsletters:

Profit = Total Revenue – Total Cost

Profit = 50 Gold Newsletters x $10 per Gold Newsletter – 50 Gold Newsletters x $2 per Gold Newsletter + 50 Silver Newsletters x $8 per Silver Newsletter– 50 Silver Newsletters x $1 per Silver Newsletter

Profit = $400 + $350= $750

Because of the lower profit margin from the Silver Newsletters, total profit declines.

Positive Cannibalization

In Positive Cannibalization, the new product increases overall profits. In this example, Get Financial Ready! introduces a new subscription option, the Platinum Newsletter. The Platinum Newsletter has more features, is priced at $12 per subscription, and costs $3 to compose. Half of the Gold Newsletter subscribers opt for the Platinum Newsletter:

Profit = Total Revenue – Total Cost

Profit = 50 Gold Newsletters x $10 per Gold Newsletter – 50 Gold Newsletters x $2 per Gold Newsletter + 50 Platinum Newsletters x $12 per Platinum Newsletter – 50 Platinum Newsletters x $3 per Platinum Newsletter

Profit = $400 + $450= $850

Because of the higher profit margin from the Platinum Newsletters, total profit increases.

In the above examples, we have intentionally oversimplified positive and negative cannibalization to illustrate the effect of unit profit margin. If the total number of subscribers remains constant, then switching subscribers from lower margin products to higher margin products will increase profit.

In reality, the nonprofit will need to estimate the number of customers they will acquire and lose with their new products, as well as how the new products will affect brand positioning. Lower margin products can improve profitability if the new product attracts a large number of new customers. Higher margin products can lower profitability if unit sales are insufficient.

Conclusion: Introducing new products and services is a strategic decision, requiring analysis of market segments, choosing a segment to target, and properly positioning a product. Negative cannibalization reduces profits through customers trading down to lower unit margin products or loss of customers. Positive cannibalization can benefit a nonprofit through adoption of higher margin products by current customers and acquisition of new customers.

Comments

  1. GorkemApril 3, 2025 at 12:31 PM

    This comment has been removed by the author.

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  2. GorkemApril 3, 2025 at 12:32 PM

    Any other informations about Positive Cannibalization please? Thank you

    ReplyDelete

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