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What is sales cannibalization?

To explain what this term means and why it is important, let me provide you with a simple example.

Imagine two shops, A and B situated next to each other selling mobile phones. There is a high possibility that there might be some intersection in their portfolios which means that there may be some handsets being sold in both the shops. Given their proximity in distance, the price of the handset in shop A might affect volume sales in shop B. This phenomenon is called as sales cannibalization.

The above example is very simplistic. The dynamics of sales cannibalization are complex and there are many kinds of cannibalization phenomena. Let me try to list a few that come to my mind –

1. Cannibalization by a competing store

2. Cannibalization by a competing product which is similar to the product in consideration

3. Cannibalization by other brands

These forces of cannibalization are at play in every kind of industry and it is necessary to factor them into any driver analysis of sales.

Competitor price is generally taken as a variable representing cannibalization. The co-efficient obtained through OLS regression for any cannibalization variable must be positive. It follows from the logic that your sales volume goes up as the competitor increases price of his goods.

This concept is applicable to any industry where there exists substitute products.

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