If you own a business, you already know the impact certain products have on customers compared to others. At the same time, you know how new products can receive more attention compared to older ones, which will decrease in attention.
Well, there is a thing called the cannibalization rate, and it is meant to calculate the impact new products have on sales revenue for existing products. If you want to know more about it, this article contains relevant information you should know.
What is the Cannibalization Rate?
So, as mentioned above, the cannibalization rate has the ability to estimate the impact new products have on sales revenue for existing products. When your business releases new products, the existing ones are losing the attention and demand from customers. Cannibalization in business can be a challenge to sales and marketing teams that are focusing on the existing products.
It’s not unusual for businesses to release new and superior products in order to generate more sales. They do it in order to be on top, but the method is not free of risks, though. If an existing product and new one are different and can compete, then this is particularly true. If you have a new product that is somehow overshadowing the existing one, then you are at risk of losing the already existing customers.
There is one way that many organizations use to decrease the risk of new product cannibalization. They offer new products to already existing customers at a discounted rate. If you use this, it can help enlist happy customers in your formal product launch.
The metric is used by the project development manager and sales manager./
How is it Calculated?
It’s difficult to know how much a new product will impact your business. You can’t see in the future, so it’s hard to know if the new product will cut into the sales of already existing products. However, there is a formula that can help you determine that, and it looks like this:
Cannibalization Rate = Sales Loss of Existing Product / Sales of the New Product
If that is still confusing, let’s take a look at an example. Let’s say that you have a company that sells aromatic candles for (AC) for $10, and you launch a new line of candles with a different and unique shape, and new aroma (NAC). So, your company sells 70 NAC and the cannibalization rate is 60%. Therefore, 60% of the sales of the new product are taken from the existing product. The cannibalization rate will show the loss in sales of the existing product:
60% of 70 NAC = 42
So, this shows that the existing product will decrease in sales by 42 from its current sales.
Final Thoughts
If you own a company and you launch a new product, it may impact the existing one and decrease its sales, making you lose customers as a consequence. The cannibalization rate allows you to calculate the loss of sales, and the impact new products have on existing ones. Hopefully, you found this information helpful.