You must cannibalize yourself before others do.  Do you have a weak spot that can be exploited?  If so it will be.  I am not advocating selling you high end product for zero dollars.  What I am suggesting is that you must make sure that your point of differentiation provides real value.  Newspapers classified ads created real value for a hundred or more years but when confronted with new technology they stuck their collective heads in the sand and hoped it was a fad.  Their real value (providing reach in a local community) was eliminated and became a commodity.

Trends that will kill your business move slowly until they don’t.

Just so we are on the same page – Cannibalization in this case does not mean eating people it has to do with the introduction of a product or service that eats in to a company’s primary revenue stream. 

Many companies have faced this issue in the past – some famously have clung to their antiquated business model or product and rode it into the ground. A few examples: The Recording Industry for not embracing digital downloading; The Movie Industry in resisting but ultimately embracing the VCR; and even in my own career as EarthLink did not want to offer an Email only subscription for fear it would increase the cancellation of people paying $21.95 per month for dial up when they currently had high speed access and were keeping their dial up account only to maintain their email address.  Hey people figure this stuff out!

So what is the problem here?  Why should you embrace new products that could ultimately cost you sales in your primary business?  Single answer is that if a new product comes along or business model that greatly lowers the value proposition of your current product or if the new “thing” adds more value to a certain segment of your current customers, then someone will offer the service to your customer and your customer (at least a portion) will buy it from them and leave you.  Bottom line is that a portion of your clients are gone as soon as the new option becomes available.  The big questions are how many and how soon?

As a leader of a start-up you it is rare indeed that your new business will face the challenge of cannibalization – but if you are selling into a market where your product risks cannibalizing your potential client’s primary revenue stream you need to consider these issues and combat them.

Here are my three steps to confronting/battling those who bring up cannibalization as a reason NOT to adopt your new product, service, or business model:

1. Show that the change will happen and what effect it will ultimately have on the business if adopted by competitors (The Doom Case).  Make no mistake it is not a question of “if” but “when”.
2. Create the financial models to show the impact of new product adoption allowing for cannibalization to occur.
3. Demonstrate or provide a plan on how the business can be changed where by the new product if adopted could boost the business without destroying the entire revenue stream (This is the action plan behind the business case in step two).
4. Give anecdotal examples of how cannibalization issues have affected similar businesses.

A word of warning – this is BIG risk stuff – Do your homework!  In my experience the change usually does not happen as quickly as you think (so you have more time to milk the old model or products) and there is not perfect information (so your customers will not immediately change to the new model or product). 

Also, pray that you are not working for the Encyclopedia Britannica as Microsoft rolls out Encarta where a $1,300 set of books are replaced with a $50 and then free online version offering greater quality.  That spells GAME OVER!