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Cannibalization Definition

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Cannibalization Definition CANNIBALIZATION: Cannibalization refers to the notion of a company making a conscious business decision that will have a negative impact on either a current product or member of a distribution channel (or entire channel, via disintermediation). This type of decision is typically designed to allow the company to survive in the long-term, and avoid having its products challenged by competitors' products as technology progresses. PRODUCT BUILDING Product Bundling refers to the bundling together of more than one product for a sale. This is very common for digital products, where the marginal costs of each product is very low. If most of the marginal cost is associated with packaging and distribution, this is further reduced when the products are bundled together, as they share the same costs of packaging and distribution. Thus the incremental cost to the firm (i.e. Microsoft!) for bundling together additional software products is very small (actually zero aside from any opportunity cost). Thus a suite of products may allow for greater market penetration into different software markets than if the software was sold separately. For software that is not currently used by the consumer, but is purchased through a bundled package, it works to lock-in the consumer once he/she decides to use that category of software. Thus bundled software can ensure strong market positions across multiple markets. While product bundling is a regular phenomena for software and related products, product unbundling may occur in the traditional content provider markets as microtransactions can provide payment options for smaller increments of the product. Thus rather than having to buy an entire CD (a bundling of different song titles, mostly of little relevance to each other) the consumer may be able to pay for a single song title, unbundled. BRAND A brand is a product from a known source (organization). The name of the organization can also serve as a brand. The brand value reflects how a product's name, or company name, is perceived by the marketplace, whether that is a target audience for a product or the marketplace in general (clearly these can have different meanings and therefore different values). It is important to understand the meaning and the value of the brand (for each target audience) in order to develop an effective marketing mix, for each target audience. ADVERTISING: ADVERTISING is a paid form of communicating a message by the use of various media. It is persuasive, informative, and designed to influence purchasing behavior or thought patterns. 1 BARTERING: BARTERING is a system of trading goods and services for advertising time or space. For example, a hotel might trade-out the value of one or two nights' stay to the newspaper in return for the same value in advertising space. BENCHMARKS: BENCHMARKS are standards or averages by which similar items can be compared. CONTEXTUAL MARKETING: CONTEXTUAL MARKETING is marketing that occurs in the context of when a person is more likely to be interested in the product/industry. Thus, a page sponsorship can be considered contextual, as the viewer has elected to view the page, and assuming the sponsorship is for a product that is related to the content of the page, the product has the right context (the viewer self-selected to view the content). Text advertisements that are relevant to the content of the web page they appear are another example of contextual marketing. Contextual Marketing will also become more evident with the evolution of wireless marketing (m-commerce). Wireless marketing will take advantage of knowing where the consumer is located using GPS. This can then translate into marketing messages that have direct relevance to the consumer as the messages relate to the context of the consumer at the point in time they are being delivered. COOPERATIVE ADVERTISING: COOPERATIVE ADVERTISING (co-op advertising) is an arrangement between manufacturer and retailer to reimburse the retailer in full or in part for local placement of manufacturer-produced ads and commercials. These ads would include the addition of the retailer's name in the copy. Co-op advertising might also mean a joint effort between two or more businesses to pool advertising money for more buying power. The ads would feature both company names and benefits. CPT: CPT (cost per thousand) divides the cost of an advertising medium by the number of persons in the target audience who are reached by the medium. DEMOGRAPHICS: DEMOGRAPHICS are the physical characteristics of a population such as age, sex, marital status, family size, education, geographic location, and occupation. 2 LOGO: LOGO is a unique symbol or design that represents a company. Also called, a trademark. MARKETING: MARKETING includes identifying unmet needs; producing products and services to meet those needs: and pricing, distributing, and promoting those products and services to produce a profit. MARKETING MIX / NICHE: MARKETING MIX includes a combination of product, packaging, price, channels of distribution, advertising, promotion, and personal selling to get the product in the hands of the customer. MARKET NICHE is the unique advantage or benefit a product or service offers a particular group of customers. Marketing success is dependent upon establishing how a product stands out from similar ones. MEDIA: MEDIA (singular medium) are the print (newspaper, magazines, etc.) and electronic (radio and television) communication devices used for advertising. POSITIONING: POSITIONING is the attempt to control the public's perception of a product or service as it relates to competitive products. PUBLIC RELATIONS: PUBLIC RELATIONS is a form of communication primarily directed tiward gaining public understanding and acceptance. Public relations usually deals with issues rather than products or services, and is used to build goodwill with public or employeess. Examples of public relations are employee training, support of charitable events, or a news release about some positive community participation. PURCHASE CYCLES: 3 PURCHASE CYCLES are the time periods between purchases of a product, which is important in estimating product or service demand. TARGET MARKET: Target Market is the specific group of customers that a company aims to capture. They have been identified as people with needs or wants that can be met with the products or services from this company. TEST MARKETING: Test Marketing is a limited introduction of a product or service to test public reaction for a full market strategy. Giving the public a small sample of what is to be offered is a form of test marketing. OUTSOURCING: Paying another company to provide services which a company might otherwise have employed its own staff to perform, e.g. software development. (1995-03-28) AVERAGE COST: The average cost of a unit of product is made up of its fixed costs/#units produced, and the variable cost per unit. With digital products, where the variable costs are very small (and in some instances zero) the average cost of the product declines as more units are produced and sold. Thus the market leader for a product typically has the lowest average costs per unit. This allows the leader to have increased margins, and increased flexibility to lower price. This is one of the reasons why first-mover advantage can be so important. BREAK EVEN ANALYSIS: Break Even Analysis refers to the calculation to determine how much product a company must sell in order to break even on that product. It is an effective analysis to measure the impact of different marketing decisions. It can focus on the product, or incremental changes to the product to determine the potential outcomes of marketing tactics. The formula for a break even analysis is: Break even point ($) = (Total Fixed Costs + Total Variable Costs). Total Variable Costs = Variable cost per unit x units sold Unit contribution (contribution margin) = Price per unit - Variable cost per unit. When looking at making a change to the marketing program, one can calculate the incremental break even volume, to determine the merits of the change. This determines the required volume needed such that there is no effect to the company due to the change. 4 If making changes to fixed costs (changing advertising expenditure etc.): Incremental break even volume = change in expenditure / unit contribution. Thus if a company increased its advertising expenditure by $1 million, and its unit contribution for the specific product is $20, then the company would need to sell an additional 50,000 units to break even on the decision. If making changes to the unit contribution (change in price, or variable costs): Incremental break even volume = (Old Unit Volume x (Old Unit Contribution - New Unit Contribution)) / New Unit Contribution Thus if a company increased its price from $15 to $20, and had variable costs of $10, it is increasing its unit contribution from $5 to $10, assume also an old unit volume of 1 million. It could therefore reduce its volume by 500,000 to break even on the decision. 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: 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. FIXED COSTS: Fixed costs refer to the costs associated with a product, that are fixed over a number of units. Thus regardless of the number of units produced and sold, the fixed costs remain the same.
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