July 17, 2008

Multichannel Forensics A to Z: Cannibalization

Almost all of my Multichannel Forensics projects (book, study) are meant to, in some way, demonstrate whether cannibalization is a problem across merchandise divisions or physical channels.

Cannibalization is a vexing problem in business. Many online marketers and web analytics experts were not raised in the era of paper-based direct marketing, and therefore, were never made aware of the ills of cannibalization.

Cannibalization creeps into every aspect of our lives, we're just not good at measuring it. At the dinner table, cannibalization happens when your child would eat an apple, but chooses instead to eat Cheetos if offered next to the apple. In Web Analytics, cannibalization happens when you add six new products to the six existing products featured on a landing page --- sales almost never double, they grow incrementally, at maybe fifteen or twenty percent. The six new products increase sales, but also reduce sales that would have been recorded among the six existing products.

Multichannel Forensics help demonstrate the long-term impact of short-term cannibalization issues. If we cause a customer to switch product lines, and as a consequence, the customer is more valuable, then we've done a good thing. But if we cause the customer to switch product lines, causing the customer to spend the same amount of volume, we're simply dealing with sku proliferation, an issue that is seldom positive for anybody other than Amazon.com.

Multichannel Forensics projects use merchandise divisions as micro-channels, evaluating the way customers move in and out of merchandise divisions over the course of the customer life cycle.

2 comments:

  1. Anonymous9:48 PM

    Kevin,
    Please define what you mean by SKU proliferation.
    Also, apropos Chris Anderson's The Long Tail(I think recently updated), he believes the multiple of skus, the niche markets(less than top 10 sellers), are vitally important. However your post seems to argue against that, proving the logic that a limited resource(consumer wallets) spreads the profit among skus making them less valuable.
    Given that so many retailers(search for watches on Macys.com or Nordstroms or Amazon) offer such a huge offering of SKUs, do you feel that we will have an eventual darwinism of manufacturers or is Anderson right, the non-top sellers will continue to perform ad nauseum?
    K

    ReplyDelete
  2. SKU proliferation goes hand in hand with customer productivity, delivery expense, and inventory carrying costs. If one of those three issues become too expensive, you have a SKU problem.

    ReplyDelete