Situation

Any company that sells similar products at a range of prices fears cannibalization. Take the case of a subscription media company that expanded from one product line to a mix of offers that included several similar but lower-priced products sold through a number of channels. Executives felt that the new offers were necessary because the original product, while quite profitable, was losing market share and might never penetrate certain customer segments. The new products did indeed attract these elusive customers, but the lower prices also lured some established customers away from the mature product.

Complication

Deciding how aggressively to push the new offers proved difficult. The company's customer-relationship-management system allowed marketers to pinpoint the extent of the cannibalization. Yet the data implied simplistic recommendations—for instance, abandoning the new products without regard for their strategic importance. Unless the implications were clarified, product managers balked at exploring the trade-offs between market share and profitability. Indeed, they had an incentive not to do so, for each product was organized as a separate, competing business with its own sales targets.

Resolution

To break the stalemate, senior executives looked beyond traditional marketing approaches to data optimization techniques long used in operations research for planning production, scheduling workers, managing yields, and allocating resources. These tools rely on mathematical formulas that help identify the best outcomes given a set of business objectives and constraints.¹ After quantifying the impact of various options—including increasing the market share of the new brands at the expense of the old one—managers identified a sweet spot that balanced their short-term profit objectives against the company's long-term goals (exhibit) and reconciled the interests of competing product managers. The result was an overall profit increase of 10 percent for these brands over six months.

Implications

The rising complexity of channels and products, the shortening of product life cycles, and an explosion in customer data all make it increasingly difficult for companies to evaluate their strategic alternatives. Optimization techniques can shed light on the way sales and marketing resources should be allocated and how products or services should be tailored to an evolving marketplace. Using these techniques, the subscription media company not only solved its cannibalization problem but also discovered several customer segments for which it had no optimal solution. This discovery prompted the development of new product ideas to serve them.