Cannibalization

Definition: Sales cannibalization is when one product decreases sales of another product. Price cannibalization is the difference between a higher and lower price of a product multiplied by the number of units you would sell at the higher price.

Sales cannibalization example: A new product may be better than an existing product, causing people to stop buying the existing product.

Price cannibalization example: Let’s say you usually sell your widgets at $100 but you lower the price to $90 to drive growth. If you normally sell 1,000 widgets, your profit dropped $10,000 ($100-$90=$10 X 1,000).

Why it’s important: The costs of these must be included in any profitability analyses of new products or price changes. Many people don’t include them and overestimate the profits of the new product or price change.

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