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:

The Age Of Neo Consumerism

I am writing this amidst the weekend cacophony at my place which is just getting louder with the grace of euro 2008 quarter finals, endless bollywood award functions telecasted on multiple channels, my desperate attempt to catch a glimpse of the late night edition news headlines and the never ending sound of my inner self.

I had somewhere read (yeah “somewhere”, it’s kind of difficult to remember where I read great articles, interviews or just random thoughts of people’s over fertile imagination... considering the massive overflow of information one is subjected to. Anyways, I feel that as long as remember things that I read, the source does not matter) that an urban individual on an average is subjected to 44 brands daily. My very first reaction on reading this was that of obvious over estimation. Just to satisfy my anxious self, one fine day I decided to actually sit down and note all the brands that I come across from the moment I get up till the wee hours of the night when my enthusiasm actually runs out. Any guesses how many brands figured out on my list? 54!!! And that too on a rather passive day which did not include any sort of major outdoor activity, that would have supplemented the list an made it longer.

So I guess the anonymous estimator’s estimates are pretty much fine tuned. Today I believe is the age of Neo Consumers, consumers who are aware, receptive to company’s offers, are qualified for the product or service offered and have the relevant incomes to actually make a well informed purchase decision. Rather than just buying something for the heck of it people actually weight their options, consider varied elements and go about making their choices. What I am saying pertains more to the modern urban India rather than the rural “Bharat”.

The quality of communication that is projected towards the consumers is becoming more and more sophisticated and polished. Consumers are not treated as intellectually challenged where the onus of consumer education falls on the agencies, but are treated with respect and in some rare cases even inspirational. The better reception and mobility of urban consumers have opened up new avenues for marketers to proliferate deeper into the consumer’s lives and carve out a niche for their brands. More and more people are conscious about their brand choices. They believe in brand associations and want to project a self-relevant image. People’s desire to stand out and have a distinctive appeal is augmented by the kind of brands they use. They let the brands speak for themselves.

Customer inputs for developing new products and services are vital. Companies which are constantly in sync with their customers and incorporate their insights are here to stay and lead. This fact can be proven by the tremendous popularity achieved by many companies who topped this year’s Brand Equity Survey.

I believe that the days are not far when people will have so strong brand connect that they will stand for the brands they believe in. Customers will have a greater say in the product design. This will facilitate a greater emotional bond that people will have with their brands. Companies that harp the tune of emotional appeal have a way to go. Needless to say that the product quality and product perceived-expected value equation need to be at par with the brand promise. Marketers have to scale unexplored heights and constantly develop better products and services, with better benefits that give actual solutions and make life easy.

I also believe that the marketing and the advertising fraternity shall have a great hand in shaping the way brands communicate with the users who feel the brand experience. The age of Neo Consumerism has begun, let’s just let it last as long as possible.