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Friday, October 16, 2009

Brand Cannibalization



In today's world “premiumization,” “trading up,” are receiving the same attention as "commoditization" and "trading down".A strategy which might click in one part of the world might have to be executed in complete opposite way in the other part.

Economic downturns are now causing consumers to trade down, and many midtier and premium brands are losing share to low-priced rivals. Their managers face a classic strategic dilemma: Should they tackle the threat head-on by reducing prices, knowing that will destroy profits in the short term and brand equity in the long term? Or should they hold the line, hope for better times to return, and in the meantime lose customers who might never come back? Given how unpalatable both those alternatives can be, many companies are now considering a third option: launching a fighter brand.

A fighter brand is designed to combat, and ideally eliminate, low-price competitors while protecting an organization’s premium-price offerings.In its best applications, a fighter brand strategy can have even more impressive results.A fighter brand not only eliminates competitors but also opens up a new, lower-end market for the organization to pursue.

But launching a fighter brand is like walking on a double edged sword. Great application might leap frog you way beyond competition and have your success stories illustrated in b-school cases however there are also chances of misfire and lead to significant collateral losses for the companies that initiated them.

Account For Cannibalization

Most fighter brands are created explicitly to win back customers that have switched to a low-priced rival. Unfortunately, once deployed, many have an annoying tendency to also acquire customers from a company’s own premium offering, which is called cannibalization.You must ensure that it appeals to the price-conscious segment you want to attract while guaranteeing that it falls short(in terms of value/quality) for current consumers of your premium brand. That means you must match your fighter brand’s low price with equally low perceived quality.To prevent cannibalization, a company must deliberately lessen the value, appeal, and accessibility of its fighter brand to its premium brand’s target segments. It may even need to actively disable existing product features and withhold standard marketing support from the fighter brand.

Managers need to weigh the effects of cannibalization before rolling out fighter brands. Because these brands are explicitly oriented toward the rivals that have stolen share from a company, the initial break-even calculations used to justify their launch often are oversimplistically derived from an estimate of the lost sales that can be recouped, which not usually the case.An accurate break-even analysis must account for cannibalization as well. How can you predict whether excessive cannibalization will occur? Test-marketing is the best way to ensure that a fighter brand can compete with low-price offerings without robbing significant sales from its higher-price, more profitable sister brand.

The Gospel:

To calculate the effect of cannibalization, the Break Even Cannibalization rate for a change in a product is:

New Product Unit Contribution / Old Product Unit Contribution.
New Product is the planned addition to a product line (or change to a product within a product line), Old Product is the product that loses sales to the new product (or the product line that loses sales). The cannibalization rate refers to the percentage of new product that would have gone to the old product, this must be lower than the break even cannibalization rate in order for the change to be profitable. When making changes to a specific product, cannibalization of other products may occur. To calculate the effect of cannibalization, the Break Even Cannibalization rate for a change in a product is:

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