In the rapid change of today’s technology environment, doing nothing is doing something, and that something is falling behind. Companies are always under the gun to be more creative, more effective, and more responsive to rapidly changing market conditions. One radical strategy that’s nonetheless gaining traction is “product cannibalization.” In this strategy, a firm deliberately introduces a new product that cannibalizes the company’s own sales or market demand for its current products. Though it sounds counterintuitive at first glance, this strategy can be one of the most effective long-term levers for growth and market leadership. This article outlines some of the benefits and dangers of this new strategy. It follows one AI startup that’s considering the option to cannibalize its product once every six months. It provides valuable, actionable guidance for companies that are considering making similar relocations.

Understanding Product Cannibalization

Distance between product lines can lead to product cannibalization when the creating or marketing company releases the new Product x. This frequently results in cannibalization of sales of its current products. This second one is often a hidden factor — it occurs because the new product pulls customers from the previous version. Cannibalization can seem like a loss on the surface. It can be an important tactical tool in the sectors where technology is changing quickly on the ground. It’s easy to assume that companies would avoid cannibalizing their own products. They do this to maintain a competitive edge, acquire new market segments, and foster innovation.

The decision to cannibalize a product line isn’t one made easily. It takes a lot of hard work, dedication to detail, and profound knowledge of creative market forces. Companies have to estimate if the profits they will earn from the new product are greater than what they’ll lose from the cannibalized product. This means assessing attributes like market size, potential for growth, competitive environment, and the needs of customers. By investing wisely into unknown territory, companies stand to set themselves up for success tomorrow even as change continues to disrupt what we know today.

Consider the example of an AI startup. Perhaps this startup has truly created a never-before-seen whizbang new AI-powered software solution. As we all know, the technology landscape is ever-changing, and new advancements happen at a rapid pace. To keep pace with the competition, the startup could be launching a new version of its software every six months. With each update, we’ll be adding new powerful AI algorithms and features. As a result, the new version will almost certainly cannibalize sales from the older one. We appreciated your desire to move forward and get your hands on the new features!

The Potential Benefits of Intentional Cannibalization

Staying Ahead of the Curve

One of the greatest advantages of product cannibalization is that, on the whole, it compels a company to innovate or perish. By strategically obsoleting its own innovations, the company guarantees that it leads the cutting edge of its market. This is even more crucial in fast-moving fields such as technology, where today’s cutting edge advancements may become completely outdated within months.

Capturing New Market Segments

Cannibalization can be a positive thing — a signal that you’re using new products to attract new customers, or expand into new market segments. Perhaps the new product is targeting a younger demographic, or perhaps it has features that your current product does not. A singer can touch more lives with beautiful songs if their catalog is deep and wide. This strategy has been key to increasing its overall market share.

Driving Innovation and Learning

Creating and bringing new products to market fosters a culture of innovation in the organization. These processes regularly involve the creation of products that could potentially cannibalize established offerings. Most importantly, it fosters a culture of innovation, empowering employees to think outside the box, pilot new technologies, and learn from failures. This nonstop cycle of innovation not only drives breakthrough discoveries, but drives our nation’s competitive edge.

Strategic Market Positioning

Sometimes, cannibalization is a smart tactical strategy to pre-empt or defend market share from competitors. A company might launch an entirely new product that goes head-to-head with a competitor’s product. Known as predator shipping, this strategy keeps the competitor from establishing a beach head in the market. This strategy can be especially successful when a company has built up considerable brand equity or has a large base of repeat customers.

The Risks of Cannibalization

Drop in Demand for Similar Products

Product cannibalization inherently means that the increased demand for one product will cause a drop in demand for similar products. This may cannibalize sales and revenue from the current product line. Companies must figure out how much the new product will affect the cannibalized product on a gross-net basis and whether that’s better than not doing it all.

Market Saturation

Second, market saturation is a very real and risky threat. This can be a mistake—common when two identical fast-food joints spring up on the same city block. Doing so with too large a number of similar products can clutter the brand and muddy the waters for consumers. Instead, companies must make sure that each new product clearly delivers a differentiated value proposition and focuses on meeting the needs of a distinct market segment.

Local Market Cannibalization

National companies like Starbucks and Shake Shack are perpetually making decisions about where to invest in future sales growth while balancing the coming potential of local market cannibalization. Over saturating a local area with too many stores can cause per store sales to drop and their profitability along with it. Companies must have a truly rigorous understanding of the negative effects that new stores might have on their current locations before venturing out into new territories.

Sales Cross Dependencies Within the Portfolio

At times the sales cross dependencies within the portfolio are not as apparent as they may seem on the surface. An introduction of one new product can, sometimes unintentionally, affect the sales of other products within the portfolio that are unrelated. This means that companies must do some deep market research to see what that could mean for their whole line of products.

Brand Cannibalization

And critically, it’s necessary to think through the branding of the two products to avoid having your new product eat into your existing one. If the new product’s brand identity looks too much like the established identity, customers will be left scratching their heads. Further confusion serves to erode brand reputation. It’s critical for companies to maintain a strong visual divide in branding between their new innovation and legacy products.

Actionable Insights for Businesses Considering Cannibalization

Identify Potential Cannibalization

Conduct data-driven analysis to anticipate which new products, services, or business models would cannibalize current offerings. You’ll be digging into sales data, market trends, and customer behavior. This, in turn, allows one to judge which products are the most likely to suffer negative consequences from the entry of a new product.

Understand Customer Behavior

Understand customer behavior and preferences to figure out which new products or services are going to cannibalize current offerings. This can only happen with their direct input—whether through surveys, focus groups, or other forms of market research.

Develop a Cannibalization Strategy

Create an offensive plan for introducing new products or services that can’t be easily matched by existing ones. Concentrate on reducing disruption to current constituents through this change. Approach the new product rollout with intention. Market it to customers. Let them know the wonderful things that it can provide them, and provide incentives to get them to switch.

Monitor and Adjust

Monitor the cannibalization strategy’s impact on your business. Adapt as needed to keep your loyal customers safe and happy. This means monitoring sales data, customer feedback, and market trends to spot any issues that may arise and adjust accordingly.

Communicate with Customers

Define in plain language the value the new product or service will provide and share it directly with current customers to avoid alarming or driving them away. This is possible through advertising, flyer distribution, and grassroots mobilization.

Continuous Improvement vs. Disruptive Innovation

Before embarking on a cannibalization strategy, it’s important to realize there’s a difference between continuous improvement and disruptive innovation. These two approaches are each powerful drivers of innovation and progress, but they can lead to very different outcomes in a company’s competitive positioning.

This might suggest that a cannibalization strategy is at odds with supporting continuous improvement and disruptive innovation, it’s possible to support both. In the case of continuous improvement, a company might release a new version of its product every year with minor enhancements and bug fixes. In the example of disruptive innovation, a company just needs to be able to release an innovative product. This new offering would render its current product redundant.

  • Focus: Continuous improvement focuses on making small, incremental changes to existing products or processes to improve their performance, efficiency, or user experience. Disruptive innovation, on the other hand, focuses on creating new products or services that are significantly different from existing ones, often by leveraging new technologies or business models.
  • Scope: Continuous improvement typically involves refining existing products or processes, whereas disruptive innovation involves creating entirely new products or services that can potentially disrupt the market.
  • Risk: Continuous improvement is generally a lower-risk approach, as it builds on existing products or processes. Disruptive innovation, however, carries a higher risk of failure, as it involves creating something entirely new and untested.
  • Timeline: Continuous improvement is often a gradual process that occurs over time, with small improvements being made regularly. Disruptive innovation, on the other hand, can be a more rapid process, with new products or services being launched quickly to capitalize on emerging trends or technologies.
  • Impact: Continuous improvement can lead to incremental improvements in product performance or user experience, whereas disruptive innovation can lead to significant changes in the market, potentially disrupting existing business models or industries.

Windsurf’s extreme ‘cannibalization’ strategy, though quite dangerous, represents a red hot strategy for fueling innovation and staying on the competitive cutting edge. By intentionally disrupting existing products, companies can force themselves to continuously improve, capture new market segments, and stay ahead of the curve. Consider the potential upside and downside carefully. Have a clear game plan and keep a strong pulse on what it’s doing to your current clientele. Ultimately, the decision to cannibalize a product should be based on a thorough understanding of market dynamics, customer behavior, and the company's overall strategic goals.

The Bottom Line

Windsurf's radical 'cannibalization' strategy, while risky, can be a powerful tool for driving innovation and maintaining a competitive edge. By intentionally disrupting existing products, companies can force themselves to continuously improve, capture new market segments, and stay ahead of the curve. However, it's crucial to carefully weigh the potential benefits and risks, develop a well-defined strategy, and monitor the impact on existing customers. Ultimately, the decision to cannibalize a product should be based on a thorough understanding of market dynamics, customer behavior, and the company's overall strategic goals.