Question

If a company is experiencing cannibalization from the launch of a new product, how would that translate onto the firm's financial statements? / How can you tell that a firm is experiencing cannibalization, from looking at the income statemements alone?

Answer 1

Meaning Of Cannibalization- It means reduction in sales or revenue or market share in one of our product as a result of launch of new product by same entity.

How would that translate onto the firms Financial Statement ?

We can measure cannibaliztaion from the income satetment of a company- A working measure would be that percentage of the new product’s sales which derives from the sales of an existing product within the company’s portfolio.It means loss of sales equates to the loss of market share and come from inside not from competitive pressures i.e. reduction in sales of one exixsting product due to launch of new product.

We can identify the cannibalization in our company by analysing gain and losses in volume over the two periods (normally those immediately before and after the launch of a new product).The analysis is done on a household basis and volumes are adjusted to take account of any change in volume between the pre- and post-launch periods. From analysing pre and post changes of launch we can find the change in the allocation of profit and loss beween two product i.e. our company existing product start declineing and our new product volume start rising. If we found these changes in our income statment than it means cannibaliztion occurs due to new launch of the product.

We can calculate the effect of a cannibalization rate-

Cannibalization Rate = Sales loss of existing product / Sales of the new product