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Abstract:
different techniques which can help companies avoid and fight cannibalisation.
Introduction
branch of science to another causing the necessity to redefine the term in the
share of one product by other products of the same company (Faria and Novak,
2001; Komninos, 2002; Lin, 2005; Riggins and Narasimhan, 2001; Zhang, Lu,
Liu, 2004). To a lesser degree, other types of economic cannibalisation are also
itself. A tour operator, for example, may introduce new package tours to Spain,
which may cannibalise its current sales of packages to Greece. Although, from a
products will compete not only for customers’ money, but also for managers’
and agents’ attention, sales force time, company’s resources, shelf space,
The general idea behind cannibalisation in current paper is that the marketing
been discussed thoroughly, especially in the field of travel and tourism industry.
In this regard, the aim of the paper is to present a conceptual framework for
and tourism, but the conclusions are applicable to every industry or economic
activity.
Literature review
for online sale (Ghose, Smith and Telang, 2005), in retailing (Shah and
Avittathur, 2006).
addressed by Carpenter and Hanssens (1994) who measure the impact of price
on the overall size of the air travel market on specific flight route, and examine
models for overall passenger volume and for each fare class share. The authors
(2005) also deals with cannibalisation problems within the aviation industry, but
proposals for future strategic moves of the airport operators. Wansink et al.
that the wine promotions can cannibalise the sales of other nonpromoted wines,
innovations (Cravens, Piercy and Low, 2002) which make existing products or
for example, examine the cannibalisation among products within a product line
and develop a genetic algorithm approach to mitigate it, while Komninos (2002)
identifies offensive and defensive cannibalisation strategies which companies
low type consumers (degrading the product’s quality and price in time). The
added online community access, the seller can achieve better understanding of
levels and earlier product introductions for goods aimed at low type consumers.
Furthermore, Roberts and McEvily (2005) show that extending a product line
may cause cannibalisation not only through self-competition for market share
extensions in the UK and German detergent markets, and suggest the need for
cannibalisation.
Deleersnyder et al. (2002) focus on the cannibalisation that arises from
the use of online distribution channels for the sale of newspapers in the UK and
The Netherlands. The authors conclude that the Internet does not need to be
the industry level with the “species” perceived to be the industry as a whole and
species. At this level, the competition among companies is for market share,
sales and profits. Faria and Novak (2001), for example, present a dynamic
there are two different types of firms, small and large. Large firms want to drive
the small firms out of the market, in order to decrease the competition inside the
industry, hence increasing their market shares and profits. Their model
generates a limit cycle between the market share and the number of competitors
within the industry, so that market shares and the number of competitors
Reiffen and Ward (2005), on the other hand, evaluate the potential for
products just prior to patent expiration. They describe how such an introduction
the generic drug. Authors show that the long-run equilibrium may entail higher
precluded.
publications combine them both (e.g. Ruebeck, 2005). However, in our analysis
company’s managers.
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regardless whether the other elements of the mix (price, distribution channel and
promotion) are the same or not. The specific combination of these marketing
mixes in the corporate marketing strategy influences the customers and the
company itself and leads to different responses from them. It determines who
will buy the product (the customer mix), what products will be bought (the
product choice), where will these products be bought from (distribution channel
choice) and the customers’ perceptions about the company. For the company,
projects, the market value of the company, and the employees’ perceptions
about the company. It also leads to competition among offices for sales. These 8
paper:
channels
existing projects
overoptimistic mergers and acquisitions do not lead to synergetic effects and the
market value of the combined company is lower than the sum of the market
and/or increased costs, which finally result in diminished profits (Figure 2.)
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must constantly innovate and systematically phase out its old products and
introduce new ones before the competition does that, if it wants to maintain its
market share (Kotler, Armstrong, Saunders, Wong, 2002). It is required that the
(Crawford, 1991). The exact timing of the new product launch has to be
carefully planned. If it is very early in the product life cycle of the existing
products (i.e. in the growth stage), the new products will replace the old ones
too quickly and the latter will not be able to pay back the investments of their
development. If the new product introduction is too late (the end of the maturity
stage or during the decline) the competitors might have already launched their
substitutes which satisfy similar needs and/or serve same target segments, but
this time they are produced by the company itself and not by the competitors.
for same customers) artificially intensifies the rivalry within industry faced by
the firm as a whole and its office in particular. The presence of substitutes and
intense competition within the industry combined with low switching costs
of the customer base through substitution of high value customers with low
value ones (i.e. customer base cannibalisation) the company will face a fierce
of the firm with its suppliers, increasing their bargaining power. Therefore,
offer by a hotel valid only for online bookings made by direct customers will
consumers will need time to switch their buying behaviour. Later, when sales
from tour operators are hurt without the compensating effect of online sales, the
hotel will be forced to change its policy and mitigate the impact of
cannibalisation. On the other hand, if online sales are strong enough to over-
compensate the drop of revenues from other channels, the distribution channel
presumably more profits) from the new distribution channels mix than the
previous one, before the promotion of online sales. Therefore, the extent of
solution to a need currently being satisfied (Cravens, Piercy and Low, 2002). It
cannibalisation does not cause any problems because tourist companies can plan
efforts to cannibalise its products, before the competition does that. The
failure.
changing preferences of tourism demand. Tourist products are easily copied and
accept the new products and then trained to sell them, distribution channels
strategy must inform customers for the new products but in such a way, that the
image of the company is not hurt but enhanced and improved; finally, the
company has to change its price mix in order to extract the consumer surplus
and attract the appropriate customer mix, thus avoiding customer base
cannibalisation.
1. Product cannibalisation
scientific literature (e.g. Fligler, Fruchter, and Winer, 2006; Ghose, Smith, and
Telang, 2005; Komninos, 2002; Lin, 2005; Lomax and McWilliam, 2001;
Mason and Milne, 1994; Meredith and Maki, 2001; Reiffen and Ward, 2005;
Grasman, 2005a, 2005b; Zhang, Lu, and Liu, 2004) and is also examined for
tourism products (Carpenter and Hanssens, 1994; Wansink et al., 2006). Taylor
differentiation versus core product and so eat volume (see also Kim and
Chhajed, 1999). It denotes the situation in which the increase in sales and
profits in one product is a result of the decrease in sales and profits of other
products of one and the same company, we may see it arising from competition
between brands in a co-branding agreement. DiPietro (2005), for instance,
comments that although “…at first glance, co-branding and multibranding may
appear “…when one brand gains but the other brand that shares the space loses
concepts sharing the same production facilities cause a decrease in sales for the
product cannibalisation:
as one but could also be sold separately. The total price for the product
pack is usually lower than the sum of the prices of the individual
items, and thus, the pack will be bought rather than the separate items.
one but could not be sold separately. The authors admit that it is
difficult to identify which product is being cannibalised because the
combined products can only be sold together and not separately (p.
363).
characteristics and same target market – e.g. a hotel chain that offers
one star hotel accommodation and campsites – the two products have
excursions).
content, quality standard, duration, price range and form one product
the product line. Of course, tour operators can avoid this by managing
increases the customer choice and the probability that the seller (in our
case the tour operator) will offer a product that suits customer’s needs.
In a more practical aspect, the company can mitigate the impact of the
Zhang, Lu, and Liu (2004) introduce time in the analysis of product
versions:
-The company introduces two products – one with higher quality and
higher price, and the other one with lower quality and lower price. In this
situation, the cheaper product eats out the sales and profits of the more
expensive one.
-The company launches a higher quality and a lower quality product, but
the differences in their prices is less than the differences in the production
costs, e.g. a 4 star hotel with a 3 star wing, or with different room types
situation – clients will prefer to use the higher quality product which will
introduces a superior version of the product which cannibalises the sales of its
customers postpone their purchases waiting for better and cheaper options.
The seller is able to mitigate this cannibalisation problem, in the case when
buyers are relatively more impatient than the seller, by offering the high
quality product in the first period (e.g. hard cover book) and the low quality
product in the second period (e.g. soft cover book) (Riggins and Narasimhan,
2001). A tour operator, for example, might start to offer tours to a particular
will attract the attention of the more affluent part of the market. Consequently,
the tour operator might include cheaper options, without excluding the more
expensive ones, thus widening its customer base. It is also possible that the
company applies market skimming pricing – the new superior product starts
with a high price, the price of old product is gradually being decreased until
phasing out, so that the two products do not compete on price and attract
marketing strategy and offers the product at one and the same price without
price discrimination to all customers. High value customers will pay the same
price as low value ones, resulting in lost revenues. Moreover, the fact that the
product is bought simultaneously by high and low value customers might have
negative impact on the perceived image of the product by the high value
customers (e.g. a high class restaurant decreasing its prices in order to attract
not so affluent public). They might stop favouring it and look for other
companies’ products.
target markets. Many hotels try to attract every customer that contacts them in
their battle for revenues and market share. They accommodate at one and the
same time tourists from different market segments: leisure and business
travellers, teenagers and third age travellers, families with children and
homosexual holiday makers. The inevitable conflict between the segments leads
to the loss of one of the market segments – the business travellers might find the
hotel which accommodates also leisure travellers as too noisy and not creating
appropriate work environment and abandon they patronage for it. This could
hurt the image of the hotel as well, thus resulting in an even deeper image
families with young children and holiday makers with abnormal sexual
behaviour.
3. Distribution channel cannibalisation
contributes to the total sales and revenues of the tourist company, but it also
competes with other firms for its own sales. Distribution channel
push strategy and this channel attracts bookings and sales for the same product
from other channels. For example, a hotel offers a special promotion valid only
for direct clients with a price level below, equal to or only slightly higher than
the net rates for the tour operators. The latter will have no stimuli to sell the
hotel and will most likely exclude the property from their brochures and online
reservation systems. The hotel will attract direct clients but will lose the
customers sent by tour operators. The balance between the gain and the loss will
Trotta and Hudick, 2003; Wu, Mahajan, and Balasubramanian, 2003). Their
communications and sales tool and set promotional rates valid for internet
bookings only. And the result is that customers may relocate their bookings
to intense inter-channel conflicts (Mariga, 2003: 135) and ruins the reputation of
2006; Mols, 2001) becomes a critical instrument for revenue management. Its
goal is spreading sales among different channels in order to maximize the net
revenue of the company (sales minus booking costs). But sometimes corporate
strategies fall short of this goal and instead of increasing sales, the result of
that arises from oversaturating a given geographic area with retails outlets (e.g.
Fock, 2001), especially in the case of hotel and restaurant franchising. The goal
strategy could lead to overly optimistic forecasts for the product demand in/to
outlets which will not face enough demand to survive. They will compete with
the outlets of other companies and among themselves. The total sales of
company’s outlets in the area may be increased through the introduction of new
ones, but the average sales in one outlet could drop significantly.
4. Resource cannibalisation
different products in their fight for market share – they compete for company’s
financial, human or material resources which the company might buy or divert
from its current products. The latter activity is defined by Roberts and McEvily
resources as they are allocated into new projects which generate lower profits
The personnel of the tour operator know and sell the current products well but
the introduction of bus excursions will divert employees’ time, attention and
effort from selling current products to selling the new product. This may be at
the expense of the current products – the new product “eats out” the resources
and sales of existing ones, especially if the corporate management has set
extremely high sales targets for the new product. Another example is the
generate small incremental sales but require time, attention and material
resources. However, if the profit from the new product is greater than the profit
from the old product, the resource cannibalisation ceases to exist and the
5. Corporate cannibalisation
desirable if the value of the combined firm is higher than the sum of the market
values of the merged firms (Pinches, 1990:593-595). When the market value of
expectations for wealth growth (in terms of higher stock prices). The aim of
from the merger and the decrease of administrative costs following the
sometimes emotional and not very well financially grounded, so that the
former lose from the drop in the market value of the new company, and the
merger and acquisition activity, may find that sales from the acquired company
are going down and not up, because of cannibalisation of revenue from other
differences between the product brands of the uniting companies are small.
Furthermore, when two firms combine, the negative cash flows of some projects
cannibalize the positive cash flows of other projects (Joaquin and Khanna,
2000) – the more profitable company before the merger will cover the losses of
acquisition activities with the latest mega-merger being between the two of the
largest tour operators in Europe – My Travel and Thomas Cook. The effects of
this event on the market value, sales, and profits on the combined firm are yet to
be seen.
6. Intra-firm cannibalisation
employees and creating financial and other stimuli based on it. Practice shows,
that often the branches of one and the same company compete for the same
clients. In a small scale such internal competition is healthy and desirable. But
(like Alma tour, Astral holidays, Premier tours, Bohemia) allow the option to
reserve services through one office and to pay and receive travel documents in
another office. A problem arises when the salaries of the employees depend on
office’s sales revenues and the sale is accounted in the office where the
documents are issued and the payment is settled, but not in the office where the
bookings were made. The travel agency faces a situation in which the office
which has accepted the payment eats the revenues and bonuses of the office
which has made the booking and completed the sale. The consequence is a
internal accounting and appraisal systems of the company should take into
profits.
7. Image cannibalisation
because everything the company does reflects on its image in the long-run.
Product extensions influence the image of the company (see Pina et al., 2006)
and could cause product cannibalisation. The latter may grow to an image
offers products under the same brand with different value positioning the lower
value products will “eat out” the positive or high value image the more
expensive products create. This will happen, for instance, if a hotel chain/tour
operator introduces an inferior product under the same brand name in a brand
chain. In both cases, the image problems created by one hotel, restaurant or
other outlet will have repercussions on the image of the brand as a whole. In
order to avoid such problems hotel chains usually hold a portfolio of different
brands, each of them targeted at specific market segment. Accor, for example,
holds the budget chains Motel 6, Etap, Formule 1, the economy Ibis hotels, the
upscale and midscale Novotel, Mercure and Suitehotel brands, and the upper
scale Sofitel hotel chain. Neither of the brands in the Accor’s portfolio has the
name of the holding group which eases the management of image and market
will not be successful for the company at least in the short-run. The image of the
destination will cannibalise the image of the company and the firm will sell its
product cheaper than if the image of the destination was of an elite destination.
Further research is needed to assess whether the image of the destination serves
sometimes even desirable (in product innovations) for maintaining the market
positions of the company. In this section of the paper we turn our focus on
specific techniques for avoiding and fighting the destructive self-competition
Table 1 summarises the basic techniques for avoiding and fighting each
whole, regardless of its type and causes, requires integrative approaches for
Some of the techniques described in the table are easily implemented: the
selling new products, the evaluation of the members of the chain on a regular
basis. However, other techniques require much more time and effort like the
time periods. A third group of techniques puts attention to emotions and human
that avoiding and fighting cannibalization is not a task only for the marketing
itself in situation in which it competes with itself – its new products eat the
market share of its old products, high value customers are replaced by low value
customers, distribution channels with low net revenue per product unit replace
the distribution channels from which the company receives higher prices for its
the different types of cannibalisation and the criteria which identify the desired
and Nagle, 1998), and the sale of special products satisfying some pseudo
theoretical concepts in the paper were supported by examples from the travel
(Accessed 16.02.2006)
implications for firm valuation and capital budgeting. The Quarterly Review
http://www.urenio.org/tools/en/Product_Life_Cycle_Management.pdf
(Accessed 23.02.2006)
19.Lin, Y. (2005) Persuasive advertising and product line design. Olin School
http://www.econ.au.dk/afv/workshops/Lin_Yuanfang_Paper.pdf (Accessed
23.02.2006)
27-39
pp. 391-406
23.Mariga, J. (2003) Managing e-commerce and mobile computing
25.Meredith L., D. Maki (2001) Product cannibalisation and the role of prices.
(Accessed 04.12.2006)
HarperCollins Publishers
Available at:
http://misrc.umn.edu/workingpapers/fullPapers/2001/0123_110101.pdf
(Accessed 23.02.2006)
pp. 49-70
36.Shah, J., B. Avittathur (2006) The retailer multi-item inventory problem with
39.Taylor, D. (2004) Brand stretch: Why one in two extensions fail and how to
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1
Faria and Novak (2001) also address the problem of cannibalisation resulting from buying other companies,
but from the perspective of the industry as a whole, not from the viewpoint of market value of the company.
cannibalisation
Type of
Company
Employees’ perceptions
about the company
Marketing mix 1
Marketing mix 2
Product Price Image Product Price
cannibalisation
Place Promotion Place Promotion
Customers’ perceptions
about the company
Customers
Responses
Distribution
Customer mix Product choice channel choice
cannibalisation
Type of
Distribution
Customer base Product channel
cannibalisation cannibalisation cannibalisation