February 24, 2007

Cannibalization in the Online Channel

Earlier today, we discussed cannibalization in the catalog and e-mail marketing channels.

Cannibalization is easy to detect in advertising channels. Cannibalization is more challenging to detect in the online channel.

In e-commerce, few business leaders are willing to sacrifice sales by shutting down a website, or various merchandise divisions within a website.

As a result, we need a different tool-set for detecting if cannibalization is happening in the online channel. One way to do this is by using Multichannel Forensics.

Let's assume you sell hardware on your website. You carry three drill brands, Milwaukee, DeWalt and Skil. Management decides to carry a fourth brand, Makita. Management is concerned that Makita may cannibalize the sales of the existing brands.

One way to see what is happening, early in the process of selling Makita drills, is to look at clickstream data.
  • Step 1 = Identify which customers viewed Milwaukee, DeWalt, Skil and Makita drills during the first month that Makita drills are available. In a spreadsheet, create four columns, one for each brand. Put a "1" in the cell if the customer viewed that brand of drill, otherwise, put a "0" in the spreadsheet.
  • Step 2 = Repeat Step 1 for the second month that Makita drills were sold.
  • Step 3 = Instead of looking at Repurchase Rates, look at "Revisit Rates" --- in other words, what percentage of customers who viewed a brand last month viewed different brands this month. Use the tools and techniques in the Multichannel Forensics PDF file to compute the appropriate calculations.
Let's assume your table migration probability table looks as follows:

Repurchase Index Portion of the Migration Probability Table

Milwaukee DeWalt Skil Makita
Milwaukee 88.0% 52.0% 16.0% 8.0%
DeWalt 33.0% 79.0% 18.0% 11.0%
Skil 14.0% 23.0% 83.0% 31.0%
Makita 10.0% 14.0% 36.0% 74.0%

Remember, there are three modes we want to understand.
*** Isolation = Repurchase Index Between 0% and 19.9%.
*** Equilibrium = Repurchase Index Between 20% and 49.9%
*** Transfer = Repurchase Index Greater or Equal To 50%.

Transfer is the most likely situation to indicate that significant cannibalization is occurring.

Let's analyze the table. Milwaukee drills are in equilibrium with DeWalt, and are in isolation with Skil and Makita. The Makita brand is not cannibalizing Milwaukee drills.

DeWalt visitors transfer viewership to Milwaukee, and are in equilibrium with Skil. The Makita brand is not cannibalizing DeWalt drills.

Skil visitors are in equilibrium with Makita. This means the potential exists for Skil customers to defect to Makita.

Makita visitors are in equilibrium with Skil. We conclude that there is competition for the customer's wallet between Makita and Skil.

After several months, the analysis would switch from an analysis of visitors, to an analysis of purchasers. Any situation where transfer occurs suggests the potential for cannibalization.

In e-commerce, we need to look at visitation and purchase data, and infer cannibalization via use of Multichannel Forensics. There are other ways to do this, however, Multichannel Forensics provides a good framework for considering whether cannibalization is truly happening.

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