Marketing money and cannibalization effect

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Cannibalization. That sounds like a terrible word and it is! Pretty scary when you truely carve out some time to visualize the scene, and maybe even worst when it comes to your marketing money. A good customer database analysis prevents cannibalization.

Product and marketing cannibalizations: two concepts, one reality

Product cannibalization 

Product cannibalization is happening everyday. A new product being launched and getting your customer stopping using another product from your range. It's all about sharing the same customer base, and not being incremental, but substutitional.

But in most of the cases, product cannibalization can be ok! Products follow a linear lifecycle curve: products are being developped, launched on the market, are adopted, get mature and die at some point, being replaced by new products. To keep meeting customers' new needs and consumption habits,  product upgrades and new product ranges are being introduced, progressively remplacing the old range by new ones. That's for instance the launch of a new iPhone. Every iPhone new generation is cannibalizing the sales of the old generation and so on, this is part of the capitalism game and this is just fine. Technological evolution pushes new market on the market and every new product generation remplaces the old one. Law regulations can also drive sales cannibalization and get products being ramped down for new compliant products to come.

In all these cases, product cannibalization effect will short as under control. This is something the company is aware of and won't see it as a sales cannibalization but more as a product evolution. The ramp down of an old product will be short - or should be short and under scrutiny of the FP&A department. Stock management will be monitored, reductions and price drops can be used to accelerate the product switch on the market.

When product cannibalization was not being made on purpose, then your product management strategy needs to go through re-engineering. There's something fundamentaly broken if you don't understand the underlying dynamic. It means that the product cannibalizing the sales of the other one, has more features, a better pricing, a spread distribution or a better technology behind it (less bugs for instance). Two products are existing and instead of complementing themselves, they just eat themselves. When developping a range of product, your product and marketing departments should have a heart to work on developping complementary products - or products which will call for an upgrade. One product should not do harm to another one but rather be addressed to different segment of customers.

Marketing cannibalization

Marketing cannibalization happens when you actually spend some money to attract a customer who would have bought anyway without this incentive. You spend money which is not leading to net incremental sales but to substitutional sales. Marketing cannibalization happens when you put money in front of a sales when you shouldn' have had. As an example, this is the case when a customer is buying at your place every month and has been buying for the past 12 months but on month 13 he will purchase, again, but this time redeeming a voucher collected from a newsletter. This customer should never have received this short term sales incentive and this incentivization could have been avoided by a better marketing targeting.

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Marketing cannibalization can also happen when you purchase search engine traffic to your shop when your customer might have been very likely to purchase without having to click on a link which is going to cost you money. By sending at the right moment a personnalized email, this customer might have done the purchase in session directly - or remembered to type your shop URL directly in his browser, without having to click on paying links.

Data help you avoid marketing cannibalization. There is no way you can avoid marketing cannibalization without data and a good understand of the likelihood of a customer to purchase. While you will not be able to reduce the share of cannibalization at 100%, relying heavily on data to kick off a marketing campaign is what makes cannibalization being reduced, from its early seed. Good data usage allows you to target the right audience from the start. Data look scary as a word but it shouldn't.

The RFM segmentation is good example of a segmentation making it possible to understand where you need to spend wisely your marketing money. Not every customer need a cut in price to buy to do their next purchase. This seems pretty obvious, but reality is, in SMB businesses, the price dropping temptation is always waiting at the corner, like an old habit. It's easier to drop the price for everyone and see a short term boost rather than spending time and energy performing this kind of in-depth analysis. However this is not the way to go if you want to boost the profitability of your activity in the long run. By understanding who actually truely needs marketing money to buy from who doesn't need it, this allows you to segment your customer database and understand the needs and where you need to steer your spending to become more efficient.

RFM segmentation captures your customers habits. A brand ambassador is a big fan of your brand and product. He / she might be more interested into a special premiere program, allowing him / her to discover in exclusivity your new range of product. Exclusive offers, premium access, special customer service treatment are actions which will be appreciated by this customer segment - not necessarily the pricing drop. These very engaged customers are shopping at your place because they love your products and have a special relationship with your activity. At the other side of the customer segmentation spectrum, a potential churner might also not need an incentive to buy: If it's overall sales track record shows very low amount spent in the past, then the cost to maintain him active might just be to high. 

Segmenting your customer database is key to success. This doesn't require complex software. It can all start with a simple CSV, listing your customers, scoring their past consumtion habits. Each segment can then have a dedicated marketing stratey to maximize marketing budget return on investment. But how to do this?

A good customer segmentation helps minimizing marketing cannibalization

Incremental sales should be the norm. Cannibalization avoid as much as possible. The first step to understand your customers behaviours is to go through a data analysis. You need to use your datawarehouse, your customer database or any data storing tool you have to create a table where you can have one row for one customer and get multiple columns with as many information as possible on their behaviour: when was the latest purchase date of the customer? How many times did your customer make a purchase at your shop? What is the category of product the most purchased? What is his average spending? How many vouchers have been redeemed? Through which channel did this customer signed-up and activated at your shop? Since how long is this customer is this customer active? Did this customer participated in your "recommend a friend" program? All the data you collected so far will be helpful to analyze and breakdown your customer database into smaller similar clusters. This data you collected is worths gold. 

Get a market-driven approach. Not all the countries where you sell your products will have the same outcome. Blending all your customers into one single pot is a mistake: your brand might have not the same level of fame in each country, cultural preferences will have an impact on your customers consumption. You will also need to implement tailor-made marketing campaigns in a localized way to adapt to local consumer tastes - and this is another reason why all your segmentation should have a country approach component. Competition will be different in each country, and so on. Don't get lost into details when it comes to segmenting your customer database to avoid marketing cannibalization - but don't be to holistic.

Understand your customers likelihood to buy and predict their next purchase. Once you have enough information, you can start building a customer segmentation. There are many customer segmentations out there, one of the most beloved being the RFM segmentation. RFM stands for Recency Frequency Monetary. It's a behavioural segmentation, which means that the components used to score your customers and cluster them into similar groups are only reflecting their past behaviours toward your business: none of the demographics information such as sex, city of residence, age will be included. You can use sales prediction tools also to help you address your customer at the right moment. This might be more a tactical tool to really target your customers most likely to purchase. Anyway, there are many ways to minimize marketing cannibalization, but they all rely heavily on customer knowledge and data analysis.

If you're interested into running a RFM segmentation on your customer database or score your customers based on their likelihood to purchase next, just drop us a message. We can help.

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