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Frequently Asked Questions Vol. 8

FAQ

Question #8: What is meant by brand cannibalization and the halo effect in demand planning?

Brand cannibalization occurs when the introduction of a new product negatively impacts the demand for another. A company selling peanut butter, for example, may experience this if they start offering almond butter. While they may attract new customers, it’s also likely a portion of their existing customers will simply switch from buying one to buying the other.

That said, while brand cannibalization can shrink your bottom line, it’s not always negative. In fact, it can drive company growth and innovation. The introduction of the iPhone significantly cannibalized sales of Apple’s wildly successful product, the iPod. Yet the company has experienced enormous growth in the years since.

The halo effect, on the other hand, occurs when the purchase of one product positively correlates with the purchase of another — that is, when two products are frequently bought together. An uptick in demand for blow dryers, for instance, may correlate with an increase in sales of products designed to help protect strands from the harmful effects of heat styling.

You see these concepts play out all the time, but it’s also easy to overlook their effects when forecasting. When planning for demand — whether you’re introducing new products or running promotions on existing ones — anticipating and understanding how both might impact the demand for your existing products is key.

 

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