Test a second product

A second product's net gain is its contribution less the contribution it takes from existing products and its own extra cost; test it with a small, time-limited trial whose measure of success is set in advance.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will compute a new product's net gain after cannibalization and its extra cost, decide whether to keep it, write the net-gain rule, work a new product's figures for a real business, and find the sales a new product needs.

2. What you already have

Growth choices are compared on the change in monthly profit, worked from contribution: the price of a unit less its variable cost. A second product is one of the most tempting growth choices, because its sales look like pure addition. This lesson applies the same measure to it, with one more line: the sales it takes from what the business already sells.

3. Words for this lesson

4. Subtract what it takes from the rest

Term	What it means
Cannibalization	When a new product's sales come from customers who would otherwise have bought an existing one.
Net gain	The new product's contribution, less the contribution it takes from the existing range, less its own extra costs.
Break-even sales	The units a new product must sell for its net gain to reach zero.
Trial	A small, time-limited test of a product, with a measure of success fixed before it starts.
Shared resource	Time, space or equipment that the new product and the existing ones both use.

Net gain: 750 − 240 − 200 = 310 dollars a month. That is real, but less than half the 750 the register seemed to show.

If the smoothies had mostly replaced juices — say 180 of the 250 — the lost contribution would be 720, and the new product would lose 170 dollars a month while looking busy. The register counts every smoothie as a new sale; only the net gain shows whether the business is better off.

Another way: table

The smoothies' first month.

Line	Dollars
New contribution	750
Lost on juices	−240
Extra cost	−200
Net gain	310

Another way: steps

Multiply the new product's units by its contribution.
Multiply the switched units by the old product's contribution.
Subtract that and the new product's extra monthly cost.
For a trial target, divide the lost contribution plus the extra cost by one new unit's contribution.
Set that target before the trial, and decide against it afterward.

5. The method, step by step, and how to check it

Count the new contribution. Units of the new product sold, times its contribution. This is the figure the register shows, and the one owners tend to stop at.

Count what it takes. Estimate how many of the new product's buyers would otherwise have bought an existing product, and multiply by that product's contribution. If the new product is cheaper or less profitable than the one it replaces, every switch costs money even as sales rise.

Count its own costs. Equipment, extra cleaning, packaging, a supplier's minimum order, space on a shelf that something else used to fill.

Subtract, and read the sign. A positive net gain means the product adds profit; a negative one means it loses money, however busy it looks.

Check the result by sense. The net gain can never be larger than the new contribution. If nobody switched, it is the new contribution less the extra cost; if every buyer switched from a product with a higher contribution, it must be negative.

6. Trial it small, with the measure set first

A second product is easiest to test before it is committed to: a small batch, a few weeks, a fixed end date. The measure of success is decided before the trial — for Maya's plates, 'at least 60 plates a month, with mug sales no more than 20 down'. Set afterward, the measure tends to bend to whatever happened: a disappointing month becomes 'a promising start', and the trial never quite ends.

The break-even sales figure is the natural measure. It is the number of new units that would pay for the product's extra cost and the contribution it takes from the rest. Anything above it, sustained, is a product worth keeping; anything below it is a product the business is paying to sell.

7. Where cannibalization shows

During the trial, track the existing products as well as the new one, since that is where cannibalization shows. The signs are the old product falling while the new one rises, among the same customers: regulars switching their usual order, a cheaper version taking buyers from the more expensive one, a combined offer replacing two separate purchases. Genuinely new sales look different: customers the business has not seen before, a new time of day, a trade customer ordering in bulk.

A simple way to estimate the switch is to ask. A card at the register or a question from staff for a few weeks — 'would you have bought something else today?' — gives a rough share that is far better than assuming nobody switched.

8. Shared resources and position

Watch shared resources too. If the plates take kiln time from mugs at the busy season, they cost mug sales even without stealing customers; if the smoothies need a staff member at the blender during the lunch rush, the sandwich line slows. These costs belong in the net gain as surely as the blender does.

And ask whether the product fits the business's position. A cheap line can pull customers' view of a quality brand downward; a product far outside what the business is known for can confuse customers about what it does best. The best second products are ones that customers already ask for, sold to the customers the business already has, using capacity that would otherwise sit idle.

9. When cannibalization is worth it

Taking sales from yourself is not always bad. If a rival is about to offer the product anyway, the business may lose those customers either way, and better to lose them to its own new line. And a new product with a higher contribution than the one it replaces gains on every switch. The lesson's arithmetic handles both: the contribution lost is subtracted, so a product that replaces a lower-contribution one still shows a gain.

10. Estimating the switch

The hardest figure in the net gain is the number of buyers who switched. The register records what was sold, not what would have been sold instead. Three ways to estimate it, from cheapest to most reliable, are worth knowing.

The first is to compare the existing product's sales before and after the launch. If juice sales averaged 300 a month for a year and fell to 240 after smoothies arrived, about 60 buyers switched. The comparison is rough, because other things change too: the season, a rival's opening, the weather. Comparing with the same month of the year before helps.

The second is to ask. For a few weeks, staff ask buyers of the new product what they would have bought otherwise, or a short card at the register asks the same. The answers are imperfect, but a share taken from even a few dozen customers is a far better estimate than assuming nobody switched.

The third is to test in one place and not another. A business with two sites, or two days of the week that are much alike, can offer the new product in one and not the other, and compare the existing product's sales between them. The difference is the switch, measured directly.

Whichever method is used, the estimate belongs in the trial's plan before it starts, with the measure of success. A trial that counts only the new product's sales will always look better than it is.

11. In the world: a food truck's second menu

A taco truck in Austin added breakfast burritos, sold from 7 to 10 in the morning before its usual lunch service. The owner had worried about the extra hours more than anything else, and worked the trial through before committing.

The burritos sold about 400 a month at 3 dollars of contribution: 1,200 dollars. Some lunch regulars now came for breakfast instead, and the owner estimated from conversations about 60 lunches a month lost at 5 dollars each: 300. The extra hours of a helper, fuel and a second set of ingredients added 600 a month. Net gain: 1,200 − 300 − 600 = 300 dollars a month, far less than the 1,200 the register showed, but positive.

The break-even figure — (300 + 600) ÷ 3 = 300 burritos — became the measure for an eight-week trial, set before it began. The truck averaged 400, so the burritos stayed. The owner also moved the truck's morning stop to an office park where few lunch regulars went, which cut the cannibalization further: new customers at a new time of day, the kind of sales a second product is meant to bring.

12. In the world: why large firms cannibalize on purpose

Large companies sometimes launch products they know will take sales from their own range, because a rival would otherwise take those sales. The same arithmetic applies at any scale: the net gain is measured against what the business would have earned without the new product, and that includes what a rival might have taken.

13. Where this goes wrong

Every sale of the new product is extra. Some are taken from existing products.

Only count the product's own equipment. Count the time and space it takes from the rest as well.

Cannibalization is always bad. A new product with a higher contribution than the one it replaces gains on every switch, and one that keeps customers from a rival may save sales that would otherwise be lost.

A trial can run until it works. A trial with no end date never fails, so it never teaches anything; fix the length before it starts.

The new product's costs are only its ingredients. Its equipment, its cleaning, its packaging and the shelf space or staff time it takes from the rest all belong in the net gain.

A product that sells well in its first month will keep selling. Early buyers include the curious and the loyal regulars who try everything once. Read the trial's later weeks, when the novelty has gone, and set the break-even target against those. A product that reaches its target only in the first fortnight and then falls below it has not passed the trial, however good the launch looked; the measure is the rate it settles at, not the rate it starts with.

Asking customers is too rough to use. A rough share of switchers is far better than the unstated guess of none.

14. Monica's jam

15. Neighborhood Kitchen's smoothies

16. Maya's plate trial

17. Your turn: a smaller plate trial

18. Guided practice

Neighborhood Kitchen is testing smoothies. It sells $260$ a month, each contributing $4$ dollars, but $50$ of those buyers used to buy a juice instead, which contributed $5$ dollars. The blender and extra cleaning add $250$ dollars a month. Complete the sentence. Write a loss with a minus sign.

Smoothies bring _a dollars of contribution, and add _g dollars to the month's profit.

19. Guided practice

Complete the worked solution: Monica's farm stand adds jars of jam and sells $200$ a month at $4$ dollars of contribution each. Her fruit baskets drop by $50$ a month, losing $5$ dollars each, and jars and labels cost $80$ dollars a month. Find the jam's net gain.

20. Guided practice

Neighborhood Kitchen is testing smoothies. It sells $390$ a month, each contributing $2$ dollars, but $50$ of those buyers used to buy a juice instead, which contributed $4$ dollars. The blender and extra cleaning add $300$ dollars a month. Fill in the smoothies' contribution, the contribution lost on juices, and the net gain, all in dollars a month.

21. Practice

Neighborhood Kitchen is testing smoothies. It sells $200$ a month, each contributing $3$ dollars, but $70$ of those buyers used to buy a juice instead, which contributed $2$ dollars. The blender and extra cleaning add $250$ dollars a month. The smoothies bring $600$ dollars of contribution. Should the kitchen keep them, on these figures?

22. Practice

A bakery adds a new loaf and sells $n$ a month at $a$ dollars of contribution each. Of those buyers, $c$ used to buy the regular loaf at $b$ dollars of contribution, and the new loaf adds $f$ dollars a month of cost. Write its net gain, $g$.

23. Somewhere new

A bookshop opens a coffee corner. It sells $430$ coffees a month at 2 dollars of contribution each. Some customers now linger with a coffee instead of buying a second book: $12$ books a month, at 8 dollars of contribution each. The machine lease and supplies add $250$ dollars a month. Fill in the working sheet, in dollars a month.

24. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

25. Test question

Maya's plates would cost $100$ dollars a month extra in glaze and kiln time. Each plate contributes $5$ dollars, but she expects $30$ customers a month to buy plates instead of mugs, each mug contributing $19$ dollars. How many plates a month must she sell to break even on the new product?

26. What you can do now

You can tell whether a new product really adds profit. Tell someone why a busy new product can lose money. Next: choosing a location.