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Estimating Cannibalization Rates for Pioneering Innovations

Estimating Cannibalization Rates for Pioneering Innovations. Harald van Heerde (University of Waikato)* Shuba Srinivasan (Boston University) Marnik Dekimpe (Tilburg University & KU Leuven). Marketing Science-to-Practice (S2P) 2012.

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Estimating Cannibalization Rates for Pioneering Innovations

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  1. Estimating Cannibalization Rates for Pioneering Innovations Harald van Heerde (University of Waikato)* Shuba Srinivasan (Boston University) Marnik Dekimpe (Tilburg University & KU Leuven) Marketing Science-to-Practice (S2P) 2012 *Van Heerde, Harald J., ShubaSrinivasan, and Marnik G. Dekimpe (2010), “Estimating Cannibalization Rates for Pioneering Innovations,” Marketing Science, 29 (6), 1024-1039.

  2. Motivation • Late Steve Jobs, when introducing the iPhone: “If anyone is going to cannibalize us, I want it to be us. I don’t want it to be a competitor.” • Need to quantify the cannibalization effect.

  3. PROBLEM STATEMENT • Evaluate new product: • how much new demand • decomposition of demand • Especially difficult for radical innovations, which tend to operate on the boundary of multiple categories. • New product may draw from same-company products (cannibalization) or from other-company products (brand switching), possibly involving category switching, and, expand primary demand.

  4. ProposedApproach • Allows for decomposition percentages changing over time. • Includes short- and long-term effects. • Controls for marketing mix effects. • Handles missing data for cross-effects due to product unavailability. • Time-varying Vector Error Correction Model • Vector Error Correction (Fok et al. 2006) • Dynamic Linear Model (Van Heerde et al. 2004) • Bayesian estimation only updates when data are available.

  5. Application • Lexus RX 300 Introduction in the US. • Radical innovation: first cross-over SUV. • Potential to draw from both existing SUVs and luxury sedans. • Weekly transaction data from JD Power and Associates including sales volume, prices, etc. • Categories: luxury SUV, luxury sedans. • Weekly advertising data from TNS Media.

  6. RESULTS Primary demand effect (36%) Primary demand Within-category cannibalization (0%) Total Demand 100% Within category Secondary demand Within-category brand switching (21%) Between-category cannibalization (26%) More research is needed for empirical generalizations Between categories Between-category brand switching (16%)

  7. Managerial Implications • Focal brand introducing radical innovation: tool to evaluate net demand, accounting for within- and across-category cannibalization. • This case: cannibalization effect is 26%, so net effect 74% • Competitor: tool to assess the extent to which their products (across different categories) are affected and how they may recoup potential losses. • Industry: tool to assess to what extent innovations grow primary demand.

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