One of the worst reasons to take action (or not launch a product) is fear of cannibalization. Companies in almost all industries, including game companies, often create strategy to minimize how much some of their products or promotions pull users away from other products from the company. The concept is that you want to optimize your company’s profits by driving users to the most profitable products and ensuring that you do not move a customer or player to a product that costs less.
Some companies have very advanced algorithms to ensure they only move customers to new or other products if it does not have a greater negative impact on the product they are using or playing. Other times they will only release products in certain markets to protect their core market.
While in the short term these strategies can enhance sales, they have a long-term negative impact on profitability and can even endanger your company. The problem with this approach is that while cannibalization may diminish short term profits, it prevents competitors from winning over your customers.
The logic for forgetting about cannibalization
The argument against focusing on cannibalization is simple logic. If a customer or player will switch to one of your other offering, even if they spend less in that offering, they prefer it, otherwise they would not switch. They might prefer the price point or just like the product better but they are happier with the new offering than the existing one they are consuming. If the customer prefers the new product, then any competitive offering will have to be that much better to entice them away from your company.
You can create a simple equation to show the cost of cannibalization. To put it into mathematical terms, lets call your existing product X. Your new product is Y. You earn A per week for X and 0.5A per week for Y. Your analysis says to keep your customer from switching from X to Y, even if you need to ban the customer from Y.
The problem is that your company does not exist in a vacuum. Your competitor will eventually launch its own product Z which costs your customer 0.75A per week (or A per week but provides more value). Even if it takes 8 weeks for your competitor to launch, they eventually will. Thus, you may earn 8A from the customer but nothing else. Instead, if you have a six month (24 week) typical customer lifetime, you earn 12A from that customer instead of 8A. While cannibalization seems like a negative, moving your customer to the less expensive offering actually increases your revenue 50 percent.
Your competition will kill your product if you do not
The primary reason that you cannot avoid cannibalizing your product is that virtually all companies are in a competitive ecosystem. As smart as you think you are, your competitors are also smart and always trying to make their products better. If you can build your product at a lower price, they can build a pretty good copy at a lower price. If you can improve the product by adding certain features or changing the theme, one of your competitors has probably had the same idea and will also try it. While it may take some time for your customer to learn about the competitive product, they will in time. If you keep your customer from their optimal product, a competitor will offer it to them.
Retention, retention, retention
I have written about retention many times and how it impacts the lifetime value of your customer or player. Retention is the key to optimizing a user’s lifetime value, even if they spend a lot if they only do it once or twice it is hard to generate much revenue compared to a loyal user for years. Additionally, as the costs of acquiring users not only in games but in many businesses continues to increase, the relative value of existing customers also increases. It becomes more expensive to replace these customers with new ones so keeping existing customers is critical.
Focusing on cannibalization, however, means you are not giving customers the product they most want to consume. If you let your customer choose which offering they prefer, they will chose the one that puts them on the highest indifference curve (in non-economics speak, the one that makes them happiest). If instead, you decide to limit their options, you are putting them on a lower indifference curve (they are less happy). The less content a customer is, the more likely they are to churn.
The 9X rule strikes again
Further compounding the value of giving your customer their best possible experience is the 9X rule. I wrote about this rule a couple of years ago but in effect it says that a new product needs to be nine times better for someone to switch to it. That’s why a product like the Microsoft Surface, which may be a better tablet, garners very little market share because it is not nine times better than the iPad most people are already using.
The need for a product to be 9X better to get someone to switch compounds the argument above about the value of moving people to their favorite product even if it cannibalizes another offering from your company. They would not switch unless the new offering was 9X better. For a competitor then to win them over, it needs to be another 9X better. So rather than winning your customer over with something 9X better than your original product, they need to release a product 81X (9X9) better than the original product. This simple equation shows how much more competitive you are by disregarding cannibalization.
Focus on the customer
The bottom line is that rather than creating complex and sophisticated algorithms to minimize cannibalization, you should focus on providing as much value to your existing customer as possible. If this value causes a revenue loss, that is the price you have to pay to keep the customer longer and maximize their lifetime value to your company.
- Concern about product cannibalization, customers switching to a less profitable product of your’s, are misguided and potentially cost your company revenue.
- If you do not direct your customers to the offerings they prefer from your company competitor’s will give them a reason to switch and you will permanently lose that customer.
- By allowing your customers to move to one of your offerings that they prefer, a competitor will need to offer them something 81X better than the product they are currently using rather than just 9X better.