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Thursday, 16 June 2016

Cannibalism, Branding and Market Segmentation

Recipe tips by Hannibal
Tasting notes: To accompany this post on market segmentation and cannibalisation, the discriminating reader will enjoy fava beans* and a nice glass of chianti.  Main course: IPKat has previously brought up marketing strategies in discussions on lookalikes and pharmaceuticals (here, here and here.)  However, the subject merits a closer look, so here is your Katonomist's guide to cannibalisation and market segmentation.

Cannibalisation
When a firm's new good or service compromises the firm's existing sales volume, sales revenue or market share of an existing good or service, this is known as cannibalisation.  The new product 'eats' the market share of older one. Yum. This can be advantageous. Each new generation of the iPhone is designed to kill off sales of older generations and create demand for new products.  The iPhone 6 has cannibalised iPad sales, but with the hopes that sales of the new iPhone will more than compensate for the loss of iPad sales. Fashion also uses this strategy by deliberately making older styles become unfashionable by introducing new styles. In these cases, the planned obsolesce (deliberately limiting a product or service's useful life) of older generations and product lines is a strategic use of cannibalisation.
Elliotdeubel CC BY-SA

It's a risky strategy as cannibalisation can be problematic.  If sales of a new good or service fail to compensate for the losses arising from cannibalisation, then the result is an overall decrease.  The iPhone 6 could kill of the iPad entirely without a corresponding increase in iPhone 6 sales.

You can also eat your own customers, although this is not advised. Market segmentation, dividing and targeting different sets of your customers by their common characteristics, is a standard form of marketing and pricing strategy.  As customers are unlikely to be homogenous, they can be divided by income, preferences, demographics etc. This can be done either by offering the same product or service at different prices, known as price discrimination. The classic example is that of movie theatre tickets - matinees are cheaper than evening showings, and offering concessions to groups (known as group pricing) to students and OAPs (senior citizens in American). Another form of price discrimination is product versioning in which the seller offers slightly different goods and services (product differentiation) for the purposes of price discrimination. For example, H&M offers an off-the-shoulder blouse in its standard collection for $17.99 and a similar style in its eco-conscious Conscious collection for $39.99. The Undercover Economist, Tim Hartford, has a great example with Fair Trade coffee, "Cappuccino for the concerned £1.85. Cappuccino for the unconcerned £1.75."

Fair or unfair?
kaboompics.com
Price discrimination allows sellers to capture more of consumer surplus, which is roughly the difference between what customers are willing to pay, and what they paid.  If the producer does not segment its market, then price discrimination becomes very difficult.  However, if the producer is able to separate its markets, then it will be able to charge some customers more for what is largely the same good or service. It can be quite profitable; Tim's coffee example suggests charging an extra £0.10 for Fair Trade coffee likely netted a coffee seller an additional £0.09 in extra profits.

However, if market segmentation is unsuccessful, then the seller runs the risk of cannibalising its own markets. New supermarket products often cannibalise existing sales, as increased in Coke Zero sales largely came at the cost of Diet Coke sales.

Successful market segmentation can allow brands 'rip themselves off.'  Brands often create their own lookalikes through market segmentation when they are at low risk of cannibalisation. An example is Ralph Lauren's strategy of of multiple brand diffusion lines. Sub-brands allow brands to price discriminate by selling similar products to different market segments. There is little risk of self-cannibalisation. It is why high-end brands such as Balmain can happily do lower quality and lower cost collections for H&M.  However, the H&M blouses discussed above are a bit riskier as it is unclear whether existing H&M customers can be segmented into eco-concerned and not. Not everyone has the ability to rip-themselves off, smaller brands in particular are unlikely to have the resources to purchase and sell the large-quantities required for low-cost manufacturing of cheaper diffusion lines, as jewellery designer Wendy Brandes explains.

Self-analysis
If I were to look at myself in terms of cannibalism, price discrimination and market segmentation, it would go as follows:  My expertise is available free for IPkat readers, one-off purchases to other readers, by subscription to my university and students, and pay-as-you-go for research councils and commissioned research. My blog posts, my freebie analysis, are a loss-leader that builds my network and is a content marketing strategy. One-off purchases include sales of my research papers or book. My subscription service, in the form of my salary, provides my university and students with my expertise in an on-going basis. Pay-as-you-go research is done à la carte in the form of grants, fellowships and commissions. There is little risk of a blog post satisfying the needs of a commissioned research client; goods and services in one market segment do not cannibalise the market success of another.

IP Implications
Branding, supported by trade marks, is a key means to differentiate products and services between market segments.  Brands with basic packaging (e.g. bargain brands such as Tesco Value and Waitrose Essentials) are often associated with lower prices and, rightly or wrongly, lower quality.  Brand-conscious customers will not be attracted to these products and will be willing to pay more for a more 'up-market' brand.  Lookalike brands, an on-going thorn in the side of big brands, may blur the lines between these market segments and compromise market strategies built on price discrimination.

The confused cannibal
How to chose your menu? Market segmentation is key to enabling price discrimination with the goal of increased profits, and product differentiation through branding can be a means to segment a market.  However, if market segmentation is unsuccessful, it may result in market cannibalisation in which the gains of one product or service come at the cost of another. Yet cannibalisation may also be used strategically. Either way, I'm sticking with hummus.

*Fava beans are broad beans in the Queen's English.

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