What Is Market Saturation?
Market saturation arises when the volume of a product or service in a marketplace has been maximized. At the point of saturation, a company can only achieve further growth through new product improvements by taking existing market share from competitors or increasing overall consumer demand.
Key Takeaways
- Market saturation happens when the volume of a product or service is maximized in a market.
- To combat market saturation, firms create products that wear down over time and need replacing, such as light bulbs.
- Companies can deal with market saturation with creativity, effective pricing, or unique marketing strategies.
Causes and Market Trends
Market saturation can be microeconomic or macroeconomic. From a micro perspective, market saturation is when a specific market no longer exhibits new consumer demand for a company's product. This occurs when a company has competition or reduces the market's need for its product or service. From a macro perspective, market saturation occurs when an entire customer base has been serviced and cannot acquire new customers.
Many companies design their products to "wear down" or need replacement at some point to stop saturation. For example, new iPhone models encourage consumers to replace older models constantly. Market saturation can force companies to change their revenue models, especially when product sales slow. IBM changed its business model toward providing recurring services once it saw saturation in the large computer server market.
Company Strategies
Many companies operate with market saturation. When a company operates in a saturated market, its product or service has to be more innovative than its competitors to entice customers to buy. A company can also pivot to become the low-cost provider of a product or service or decide to operate as a premium option for the product or service.
Each strategy requires competitive pricing against other companies that choose the same pricing structure; however, companies that operate in a saturated market usually end up waging price wars with each other, continuously undercutting prices to attract customers.
Effective marketing strategies also help a company stand out in a saturated market. When a market is saturated with product and service options, especially when those options are somewhat homogeneous, effective marketing is often the difference-maker for a company.
Examples of Market Saturation
Fads or Trends: Market saturation happens when products or services in a particular market are no longer in demand due to multiple offerings by competition or simply less in demand. A consumer's interest or desire can wane as a trend or fad winds down.
Real Estate: A realtor operating in a saturated market can be challenging. Residential real estate markets ebb and flow depending on many factors. When the market is saturated, it often causes a drop in house prices, and in turn, a hit for realtors' salaries that may rely on a commission percentage.
New rules for the National Association of Realtors, expected to take effect in July 2024, may lower commissions for home buyers and sellers. If a federal court approves the changes, the standard 6% commission ends and sellers no longer have to propose compensation to prospective buyers and their agents. NAR will also require brokers to enter into written agreements with their buyers to help consumers understand what services will be provided, and at what cost.
What Signals Market Saturation?
A saturated market often includes a handful of major suppliers who all sell a specific product or products with potentially low-profit margins that make entering the market less enticing to new companies.
How Market Saturation Measured?
A saturated market or oversaturated market can make it challenging to get consumers' attention. To calculate market share, which is a way to get to market saturation, consider the industry's total sales. Companies in the pre-packaged meals e-grocery market can look at the entire industry's sales for those items and divide it by their company's total sales. This should show the percentage there is available for their product to fill. Also, researching the supply versus the need for a product or service could help calculate market saturation.
How Do Companies Overcome Market Saturation?
Creative marketing, reviewing pricing and lowering if necessary, and offering new customer service options or trying out a niche market product within the saturated market are all ways to overcome market saturation.
The Bottom Line
When the demand for a product or service peaks, market saturation occurs. Companies combat saturation by marketing products to replace existing models or implement pricing strategies.
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