How to calculate cannibalization rate

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If you run a business that you are expanding by introducing new products, you should be aware of the cannibalisation rate. This is the loss you sustain from older products due to introduction of a new product.

After all, consumers naturally seek out superior products, and they will gravitate from your older product to your newer one if it is better.

For a product to be successful it has to overcome its cannibalisation rate. It is acceptable to cannibalise sales from your other products, as long as it cannibalises more from your competitors, resulting in a net gain.

Establish a benchmark for how much your original product is selling. Assume for this example that product A sells an average of 5,000 units per year.

Introduce your new product and keep track of its sales for a period of time. Assume that in the year following product B's introduction it sold 3,000 units.

Examine the effect on your first product in relation to its sales prior to the second product's introduction. For this example, assume your first product sold 4,000 units in the year following the second product's introduction.

Subtract product A's post-introduction sales from its pre-introduction sales. In this case, it is 5,000-4,000, which makes a cannibalisation rate of 1,000.

Add the total sales together to examine the effect of the cannibalisation. In this case, you've sold 4,000 units of Product A and 3,000 of product B--a total of 7,000. This is enough to compensate for the cannibalisation rate, assuming both products cost the same to produce.