Product Line Extension and Cannibalisation
Aurelia Skincare sells a daily moisturiser at €24, with variable cost €10 and annual sales of 60,000 units. It is considering a lighter gel at €19, with variable cost €8. Consumer research forecasts first-year sales of 25,000 gel units, but 40% of those buyers say they would otherwise have bought the daily moisturiser. Launching would cost €120,000 in formulation, packaging, and campaign spend before any profit. The brand manager argues that the gel reaches younger oily-skin customers and will grow the category. The finance director argues that the forecast is mostly cannibalisation and that the €120,000 could fund a reformulation of the core product. The company has one production line that can run either product but not both at full volume; switching adds changeover time and cost. Retail partners have limited shelf space and may delist the slower line.
1. Calculate first-year net incremental contribution after launch costs at the 40% cannibalisation estimate. Show your workings.
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Existing moisturiser contribution = €24 − €10 = €14/unit. Gel contribution = €19 − €8 = €11/unit.
Gel gross contribution = 25,000 × €11 = €275,000. Cannibalised units = 40% × 25,000 = 10,000. Lost moisturiser contribution = 10,000 × €14 = €140,000. Net incremental contribution before launch cost = €275,000 − €140,000 = €135,000. After launch cost = €135,000 − €120,000 = €15,000.
The launch is positive but only just: €15,000 is about 11% of the pre-launch incremental contribution, so a small forecasting error wipes it out. It is not a clear failure, but it is not robust enough to approve on the base case alone.
2. Calculate the cannibalisation rate at which the launch breaks even and assess the risk. Recommend whether to launch, and one condition.
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Let C be cannibalised units. Break-even: 25,000 × €11 − C × €14 − €120,000 = 0. €275,000 − €120,000 = €155,000. C = €155,000 ÷ €14 = 11,071 units. As a share of gel sales: 11,071 ÷ 25,000 = 44.3%. The forecast 40% is only 4.3 percentage points below break-even-thin cover.
Risk factors: the production line cannot run both at full volume; changeover adds cost not in the calculation; retailers may delist the slower line; and the gel may appeal to existing core buyers more than research suggests. I would not launch nationally on this case. Recommend a six-month test in 10–15% of stores, with separate SKU tracking, a cannibalisation ceiling of 35%, and a proposition aimed at younger oily-skin users where the core moisturiser is less suitable. If test cannibalisation exceeds 40%, stop or reposition. Alternative: reformulate or add a variant to the core line rather than a separate sub-brand.