The Marketer’s Guide to Cannibalization

/ Zach Heller
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When marketers and businesses talk about cannibalization, they are talking about taking a bite out of their own sales with new or competing products. A good example of this is the story of Diet Coke.

Diet Coke was the pet project of a senior manager at the Coca Cola Company for many years. At the time, Coca-Cola was far and away the number one soda on the market. And the company already had a diet soda, called Tab, which was moderately successful.

Diet Coke was developed somewhat in secret because of the strong opposition to it within the company. Executives, salespeople, and marketers all believed that launching a diet soda with the Coke name would hurt sales of both Tab and Coca-Cola. They were worried about cannibalization.

Of course, those fears didn’t come to fruition in the case of Diet Coke. When it finally launched it was a huge success, and continues to be the number one diet cola on the market.

Why Fear Cannibalization?

Fears of cannibalization are often legitimate. When a company’s growth strategy involves launching new products, there is a fine line between products that are truly new and products that directly compete.

A truly new product is responding to an unmet need in the marketplace. It either targets a new group of consumers that are not already purchasing your existing product in that category, or it targets an additional need observed in the same group of consumers you already sell to.

If consumers view the new product as an alternative to the old, then cannibalization may occur. Consumers will simply shift from one product to the other.

Is Cannibalization Bad?

Cannibalization sounds bad, but that’s not always the case. It depends on a number of different factors. To illustrate this, let’s look at three different cases where cannibalization can actually be a good thing:

  1. Versioning – if you are replacing an older product with a newer version, something that is truly better, cannibalization might be good. By getting you customers to switch from the old to the new, you are better serving their needs. Although this may not directly increase sales, it does two things. First, it keeps them from switching to your competitor’s product, which is an increase in sales from what would have been. And second, it builds brand strength by creating happier customers.

  2. Upselling – if your new product is more expensive than the old product, then the value of each sale increases. In this case, successfully getting your existing customers to switch from the lower value product to the new, higher value product, will lead directly to an increase in revenue. Therefore, without adding new customers, you can still grow your business.

  3. Growing Overall Market Share – this last case is one where we can, again, look at the case of Diet Coke. Sure, some Tab drinkers switched to Diet Coke. And some Coca-Cola drinkers also switched to Diet Coke. But Diet Coke also brought in new customers that previously may have avoided soda or drank one of the competitor’s drinks. And if the losses to your old products are more than offset by the gains of the new, then the overall business grows.

How to Judge Cannibalization in Your Business

It won’t always be obvious whether a new product will cannibalize the old. But those kinds of questions and decisions may be yours to make. So how do you make them?

First, understand the costs associated with developing the new product. Second, understand the competitive landscape. What else is on offer? Are other companies aiming to steal market share with a new/better product? And third, prepare some realistic expectations of performance.

If the cost of developing and selling the new product is more than the overall gains expected by its release, you probably shouldn’t move forward. If the losses to your existing products are higher than the expected new business generated, also not the smartest decision. But if you risk losing business to a competitor and the only way to keep customers is by releasing a new product, then sometimes it’s worth the added cost.

Develop a Sure-Fire Referral Program

/ Zach Heller
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Successful referral programs are like a winning lottery ticket. When you have one, its guaranteed money for life. Except there is one main difference:

Winning the lottery is luck. A successful referral program is the result of a lot of careful planning and strategy.

Every company talks about how to get more referrals, but very few are able to develop and launch a referral program that scales their business. Here’s why.

  • They only see things from the company’s perspective. By ignoring the customer or user experience, not enough thought goes into how useful the program is.
  • They set it and forget it. Companies rush to put a referral program in place and simply assume that because they have one, people will use it. They ignore the need to measure the program’s effectiveness and optimize it over time.

To develop a sure-fire referral program, companies need to do three things well.

1) Build the referral process into the experience itself

Too often, the refer-a-friend option takes people out of the normal flow of the customer experience. But the most successful referral programs are designed within the day-to-day experience of your user base.

Ecommerce and subscription models make this even easier, by providing ready access to the referral process in the checkout or deliver process. Dropbox allows you to share files with friends who might not already have an account. Spotify allows you to invite friends to a shared playlist or to share an album who might not already have an account.

When the referral options feel like part of everyday use of the product or service, they are more likely to get used.

2) Give your customers a reason to refer people

Incentives work wonders for any referral program. Customers want to know, “what’s in it for me?”

Some of the most successful referral programs have a monetary incentive. One of the earliest programs to go viral was a deposit program from ING Direct. The bank’s customers would receive deposits of $25 or $50 for everyone they referred who opened an account.

By offering special discounts or other perks, you are giving your customers a reason to refer people beyond the simple joy of telling your friends about a great product. You are tying your own success to their interests.

3) Automate the referral program for scale

Let’s face it, in order for your referral program to really drive growth today, it needs to be automated. A process that relies on manual oversight or execution is fine, but it is not going to efficiently scale your business.

When you automate the process, relying on software and other tools to manage who is referred, the delivery of the referral, the tracking and delivery of the reward or incentive, you create a system that works without human intervention. When this is done right, you truly can set it and forget it. It will work for one person, or ten, or a hundred.

How to Improve Customer Churn

/ Zach Heller

Customer churn, as we reviewed in a post last week, is an important metric to watch. As marketers, it is in our power to improve customer churn, to keep more customers engaged and satisfied so that we don’t have to spend so much time and effort recruiting new customers.

To address customer churn, we first must understand the different things that can go wrong. Here is a list of several common reasons why your churn rate might be higher than normal:

  1. Your product does not meet their needs or solve their problem
     
  2. They had a bad shopping, sales, or service experience
     
  3. Your competitor poaches them with a special offer

The first step in fixing your churn rate problem is figuring out which of these factors is causing them to leave in the first place. It may be one or more of these reasons, or it may be something else entirely. Until you know what it is, there is little you can do to fix it.

Surveys and focus groups are the best way to diagnose the problem. You can look at data and analytics at your disposal and make educated guesses based on what you see in the marketplace, but nothing is as effective as going straight to the source.

Your frontline staff can also help here, since they are the ones closest to your customers. They might be able to share the things they hear from people who don’t become regular customers.

Now, let’s get to the answer. Below are several things you can do to improve customer churn for each of the potential issues mentioned above.

Your product does not meet their needs or solve their problem:

  1. Iterate – talk to customers and adjust your offering according to their needs
     
  2. Make sure you are targeting the right customers with your marketing
     
  3. Make sure you are not lying in your marketing copy, adjust the language and highlight the correct benefits

They had a bad shopping, sales, or service experience:

  1. Rethink service – processes, people, and technology
     
  2. Put customer relationships first and foremost in any new strategy
     
  3. Try a softer sales approach and a more hands-on, educational strategy

Your competitor poaches them with a special offer:

  1. Use marketing to highlight your unique value proposition to make it clearer why your price is what it is
     
  2. Offer discounts for loyal customers
     
  3. Continue to market to existing customers to make sure they feel the love

New Markets or New Products

/ Zach Heller

Most businesses will hit a point in time when they have to make this decision. Things are going well with the existing product or product line. You are profitable and ready to take the next step and begin to grow and expand beyond what you are already doing.

You have two key options:

  1. Expand your current product offerings into new markets, or
  2. Develop new products for the market you are already in

Most companies at this stage don’t have the money or resources to do both. And so the decision becomes an important one that sets the stage for the future prospects of your business.

Let’s look at each option in a little more detail.

Expand to New Markets

The appeal of option #1 is that what you have already works, and there is a huge swath of the market you’ve yet to reach with it. This isn’t always true, so it’s important to be truthful with yourself. If you’re already reaching everyone in the market, this option is likely not right for you.

New markets can include a number of different things. It can mean new geographical markets, states, regions or countries that you’re not currently advertising or selling in. This is the most obvious interpretation of new markets, and the one most people will think of first.

But it can mean new audience segments which your messaging is not already aimed at. For example, a company offering an online high school diploma might advertise to parents of school age children in order to get them to sign up their kids. To reach a new market, they might then advertise to adults who lack a high school diploma or its equivalent.

The advantage of the new markets strategy is that you are able to leverage a strong, proven product. Your existing business model works, and you have satisfied customers who will vouch for you. But the test is whether or not your marketing team can find the right strategy in the new markets, because it likely won’t be the same strategy that you’re using today.

Develop New Products

The appeal of option #2 is that you know your customers better than anyone else does. You know what needs they have because you are already filling at least one of them. And so you know what other solutions they are looking for.

With a new products strategy, you can do one of three things. First, you can create ancillary products that you can upsell and cross sell to your existing customers. The best example of this is Amazon’s “Customer who bought this, also bought this” feature.

Second, you can create different versions of your existing product. Perhaps you want a slimmed-down, lower cost model that appeals to a more price-conscious consumer or a feature-rich, high end model to appeal to a luxury consumer.

Finally, you can create a new product that leverages your company’s knowledge in an entirely new direction. This is the riskiness, and has elements of the new markets strategy as well since you are targeting a new audience.

Which is right for you?

That’s a decision I cannot make for you. You need to fully understand your industry and your customer base. Do the research to find out if there are, in fact, other markets out there for you to tap or other problems you can solve. And if you can test your way into one or both options above at a low initial cost, you can prove to yourself which option is best.

Use Your Products

/ Zach Heller

Yesterday, I challenged marketers to use their company’s website. Today, we move on to the products.

In writing this I’m reminded of an old commercial for Hair Club for Men. “Not only am I the president, I’m also a client.”

Why does that matter? Because it shows potential customers that the person pitching the product truly believes in it.

Often, we end up marketing products we don’t ever use. And while using the product is not a requirement, it certainly makes marketing them easier.

And so I challenge all marketers to become customers of their own company. Purchase the product (hopefully your company will reimburse you) so you can experience the whole process, from sale to delivery to use.

Along the way, you’re likely to take note of a few things you can change to improve the overall user experience. Maybe it’s the packaging or shipping method. Maybe it’s a missing feature or something that negatively effects the usability of the product.

Only when you experience your product in the same way that a customer does can you truly find the right messaging. Because you’ll be talking to them the way you’d like to be talked to if you were in their shoes.