What Is Market Saturation?

Market saturation is a situation that 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 through a rise in overall consumer demand.

Key Takeaways

  • Market saturation happens when the volume for a product or service is maxed out in a given market.
  • To help 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.

Understanding Market Saturation

Market saturation can be both microeconomic or macroeconomic. From a micro perspective, market saturation is the point when a specific market is no longer providing new demand for an individual firm. This is most often the case when a company faces fierce competition or has a reduction in 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 there are no new customer acquisition opportunities for any firm operating in the industry.

To stop this phenomenon, many companies have intentionally designed their products to "wear down" or otherwise need replacement at some point. For example, selling light bulbs that never burned out would limit consumer demand for some of General Electric's products. The problem of market saturation has also caused many companies to change their revenue models, especially when product sales begin to slow. IBM, for example, changed its business model toward providing recurring services once it saw saturation in the large computer server market.

Market saturation happens when a specific market no longer demands a product or service (microeconomic) or when the entire market has no new demand (macroeconomic).

Special Considerations

Even in light of market saturation, many companies choose to remain in operation. When a company operates in a saturated market, there are a few concepts and strategies that they can use to stand out, remain solvent, and possibly even increase sales. The first is creativity. In a saturated market, a company's product or service offering has to be more innovative than that of its competitors to entice customers to buy.

The second way to stand out is through effective pricing. Companies can approach this one of two ways. A company can either choose to become the low-cost provider of a product or service, or it can decide to operate as a premium option for the product or service. Either 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.

Using unique marketing strategies is a third way a company can 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.