V. Daniel R. Guide, Jr.
Luk N. Van Wassenhove
ou’re ruining us—remanufactured product sales are stealing new products sales” is a phrase that almost every manager of remanufacturing operations at original equipment manufacturers (OEMs) has heard from sales and marketing managers at their firm. Many new product sales teams firmly believe a remanufactured version of a product is a potential devil, cannibalizing market share from new products. Remanufacturing operations involve taking used products, bringing them back to as-new condition, and selling them again, often with exactly the same warranty as a new product. Cannibalization in our setting is when the purchase of a remanufactured version of a product displaces the sale of a new product.
At most of the OEMs we’ve collaborated with over the last dozen years, there is little factual knowledge about the potential for market cannibalization, and most managers are more than willing to hide behind “common wisdom.” One manager (at a global computer manufacturer) confidently informed us that for every
4 remanufactured products sold, 1 new product sale was cannibalized. This confidence was despite the fact that no marketing studies had been conducted at her firm. In fact, managers frequently equate maximizing new product sales with maximizing profits, and this is simply not true. There are many scenarios where offering remanufactured versions of new products creates greater profits. Internal resistance to remanufactured products from sales and marketing groups can, and often does, doom efforts to create additional profits despite the fact that remanufacturing is technically feasible at many OEMs. The marketing aspects of remanufacturing are largely unexplored by academic research and to our knowledge no company has formally examined market cannibalization from remanufactured products.
CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 2 winter 2010 cmR.berkeley.edu
So what if remanufacturing cannibalizes my new product sales?
Cannibalization is not a major concern when remanufactured versions are perfect substitutes for new products. A perfect substitute means the end product (remanufactured or containing remanufactured components/parts) is indistinguishable from a new version by a consumer. This allows the OEM to use remanufactured components and parts, significantly reducing materials costs, and does not require the firm to offer a lower selling price. Therefore, a firm in this situation can benefit from lower (re)manufacturing costs and higher profit margins. From an economics point of view, remanufacturing is attractive when the cost of remanufacturing is less than the cost of new production and the larger this differential the more attractive it becomes.
The Kodak line of single use cameras is an excellent example of perfect substitution. Kodak’s design allows for the parts to be reused multiple times, including reuse of the polymer to cast new parts. Film is the only guaranteed new material in each camera. Consumers only care about the film and readily accept the cameras with new and recovered parts and materials. In fact, most consumers have no idea their camera contains remanufactured parts, even though it is stated on the packaging. There are very few perfect substitutes currently on the market, and in consumer goods they are all basically “container” products—i.e., goods that hold something a consumer uses, such as film in a single use camera or propane fuel in a refillable cylinder.
Xerox uses recovered modules and parts blended with new modules and parts to offer newly manufactured versions of their products. These blended products allow Xerox to offer updated versions of older models at a lower sellAtalay Atasu is an Assistant Professor at the ing price, while providing their customers
College of Management at Georgia