What it is:
How it works (Example):
Market Cannibalization is also referred to as corporate cannibalism.
Market cannibalization occurs when a company's new product line crowds out the existing market for its current products, rather than expanding the company's market base as originally intended. In other words, rather than appealing to an additional segment of the market, a new product line appeals to the company's current market, reducing the demand for its established products. In this respect, market cannibalization is an instance in which a company's own two product lines compete against one another.
To illustrate, suppose a company, XYZ, reputed for its quality wristwatches, decides to introduce a line of belt-fob pocket watches in an attempt to capture a larger market segment. XYZ soon discovers that despite the successful rollout and high sales volume of its new pocket watches, its volume of wristwatch sales has taken a concurrent nosedive. The crowding-out of XYZ's wristwatch sales by its sales in pocket watches constitutes market cannibalization.
Why it Matters:
Market cannibalization can cost a corporation significant sums of money if it does not perform proper market research before a product is released. If a new version of a product is released too soon (to replace the company's existing product), or if a product is too similar to another product the corporation has released, it may end an existing product's life prematurely, hurting overall sales.