I started thinking about cannibalization recently when we were discussing some new options for Gartner clients. As I was researching this post, I was reminded of a post by my colleague, Todd Berkowitz, about strategies to avoid cannibalization.
I think Todd provides some excellent points, but I want to add another perspective to the discussion. The bottom line is that if cannibalization occurs, and you were not expecting it, then you have made some mistakes along the way.
In most cases, the idea of cannibalizing a product is thought of as a very bad thing, particularly when looking at it from an inside out perspective. In many cases, investors are scared of the impact of lower priced offering on existing product revenues. This has been discussed relative to Apple, and is usually viewed solely from a numbers perspective. As a note, in the linked article, they also talk about positive cannibalization when a new product that costs more is introduced and takes sales from an existing, lower priced product.
The other inside-out view of cannibalization comes from product manager and P&L groups that want to protect their product revenues. In these cases, the idea of their own company introducing a product that would risk revenues for the existing product is viewed as a bad thing–and many product line managers and engineering leaders will do everything they can to kill the new idea.
The other way to look at cannibalization is from the outside-in, specifically from a market and customer perspective.
Once again, Apple is an example of this case, as described in this post that has a positive view of cannibalization. It brings up the key point, if you avoid cannibalization at all costs, you may find out that you are cannibalized by a competitor–which is a much worse fate.
Look at the world of CRM. When Salesforce.com hit the market, the early customers where usually smaller companies with a handful of seat holders. They had a big message though. The on-premise players scoffed at their story and scoffed at their business model. Today, they are the market share leader in CRM. If one of the early leaders (e.g. Siebel) had made a decision to create a cloud offering, initially targeted at smaller customers, they might have reduced the growth of Salesforce. But they didn’t. And even when some on-premises leaders introduced cloud products, they purposely “crippled them” by leaving out key features so that they were not a threat to their existing business. That might work in the short term but it is the wrong long term strategy.
When you are contemplating developing and launching new products and the internal cannibalization concern arises, make sure you look at it from two perspectives:
- Market Trends- Are there emerging trends (e.g. cloud, Nexus of Forces) that pose a threat to you if a competitor introduced a new offering? Are those trends compelling enough to cause existing customers to rethink their investment–either from a total replacement or a new plan for handling expansion?
- Customer Needs- Does the new product over you a path to a larger market by addressing a different set of customer needs, even if some of your existing customers might choose to “move down” to the new product? How long will it take for you to experience overall growth across both product lines?
These two factors should be considered in tandem. If there is no trend driving change and the new customers you can appeal to don’t compensate for the lost sales, then cannibalization is a bad idea.
But if the trend is there, then it may happen anyway. So you are in a better position by offering the option yourself (and maintaining the customer relationship). In some cases, you may need to do it, even if it appears to stunt your growth–because that is better than the alternative of losing share, and revenue at an accelerating pace as the trend that drives interest hits the mainstream. Right now, the trends driven by the Nexus of Forces are driving major change in the technology industry. You may have no choice but to cannibalize yourself.
As you have the discussions, be very wary of skeptics of trends. How many times did you hear, just a few years ago, “Enterprises will never put sensitive data like customer information in the cloud”. Many of those that did are experiencing a very different world today. Instead, look at things from the outside-in; take the time to understand the potential value from a customer’s perspective. Some of those early Salesforce deals have grown into major accounts. That can happen for you to.
Again, the bottom line is that you need to consider the impact of cannibalization whenever you introduce new products that closely relate to existing ones. Todd provided great points for ways to minimize cannibalization, if that is your goal. I’ve added some ideas for purposefully driving cannibalization. Doing the right thing by the customer, with sound business logic behind it, is never a bad thing–even if some financial guys may think it is as they focus on short term performance.