formation tion Keeping Score: Financial Analysis and Performance Metrics Cannibalization Analysis What is Cannibalization? Canniballzation results when the sales of a new product in part come from sales taken away from other products sold by that Firm. Cannibalization most commonly occurs when a Firm introduces a new flanker brand or line extension into the same product line in which it already has brand representation. For example, when Proctor&Gamble introduces a new brand of laundry detergent into its extensive line of detergents, some sales for the new brand will highly likely come at the expense of one or more of P&G's existing brands of laundry detergent. In other words, the sales of P&G's existing brand of laundry detergents will be cannibalized to support sales of the new brand. The effects of cannibalization can be good or bad, depending on the overall effect on profitability for both the new brand and the cannibalized brands. Determining the effects on profitability are relatively easy. Let's examine a simple example of how it works. Assume two brands of mouthwash produced by the same Firm (P&GP) Relevant price and cost data for these brands are below. Brand A is currently sold at $1.00 per unit with associated variable costs per unit of $.60. Brand B, the new brand to be introduced, sells for a little less, say $.95 per unit. Its costs per unit are the same as for Brand ALe. $.60 per unit. Note that the resulting unit contribution for Brand B (price minus unit variable costs) is $.35 which is $.05 less than the unit contribution for Brand A This means that for each unit of Brand A that is cannibalized by Brand 8, the Firm loses s.05 in contribution. Brand A Price 1.00 Unit Variable Costs0.60 Unit Contribution 0.40 Brand B s 0.95 $ 0.60 0.35 sales that would have been for Brand A in other word, 20% of Brand , Assume that management anticipates that when Brand B is launched,20% of its sales wa, come from the contribution (gross profit) assuming Brand B not launched (and therefore no cannibalization occurs) with the contribution (gross profit) expected from the launch of Brand B with the expected level of cannibalization. Save and Submit Save All Answers Close Window e and Submit to save and submit. Click Save All Answers to sove all answers