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Cannibalization only affects revenues?

Carl asked on Aug 25, 2019 - 3 answers

Hi,

I have a question regarding cannibalization which I have a bit of a hard time understanding currently. The question in short is whether cannibalization is something you only talk about regarding revenues or if it should also take into account the variable cost that is also gone with the cannibalization?

Example:

A gym wants to open up another gym facility 2km away from its current facility. Should I in this case mention cannibalization as a loss of revenues from the first gym or as a own branch under profits where the effect from cannibalization is really: #Number of members leaving first gym * contribution margin/member

Which one is most correct?

Best,

Carl

3 answers

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Deniz
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replied on Aug 25, 2019
BCG | A.T. Kearney | University of Cambridge | 150+ coachees | 5+ years of consulting experience in London, Dubai and Istanbul
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Hi Carl,

I would go with the latter. As you mentioned cannibalization results in lower revenues, but also lower variable costs (thus you can calculate as per contribution margin).

Best,

Deniz

Francesco
Content Creator
replied on Aug 26, 2019
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Hi Carl,

cannibalization may have an impact on costs as well, therefore so far that your goal is to calculate the net impact on profits it is correct to take into account the effect on both revenues and costs.

Best,
Francesco

Anonymous A replied on Aug 25, 2019

I always use it as an own branch under profits, it's the safest way to go I think

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