Market Saturation

A scenario where the market growth trajectory of a given product stagnates

What is Market Saturation?

Market saturation is a scenario where the market growth trajectory of a given product stagnates. It essentially means that the supply of the product becomes much higher than the demand for the same.

 

Market Saturation

 

Market saturation is also referred to as the point of a product life cycle where the good or service is being made available to consumers to such a large extent that any new product idea will not be accepted in said market. From such point onwards, one company cannot gain new market share (in the same market, for the same product) without eroding another company’s market share.

At the time of a company’s inception, its rate of revenue growth trends upward. Corporations can spend two-three decades in the growth phase. However, the upward trend inevitably ends, and the rate of revenue growth starts following a downward trajectory.

Over the lifetime of an industry, the combined volume of all companies in a market will reach a level where all possible consumers of a certain product are being serviced. Essentially, a natural limit is established when a universe of regular users is exploited to the maximum by the industry. Even population growth stagnates over time as countries develop and modernize towards lower fertility rates.

 

Summary

  • Market saturation is a scenario where the market growth trajectory of a given product stagnates.
  • Companies experience market saturation when they stop gaining new customers.
  • Businesses may employ strategies such as cost-cutting, diversification, price reduction, and line expansion to tackle market saturation.

 

Market Saturation for Companies

Companies, individually, can observe market saturation whenever they stop gaining new consumers for their product. It can occur because of competition from existing companies using better technology to product differentiate or lower costs to undercut. The phenomenon is detailed in the Theory of the Firm in microeconomics.

 

How to Avoid Market Saturation

Companies may employ several strategies to avoid or delay the market saturation phase of a product life cycle. They include the following:

 

1. Price reduction

Since customers are price-sensitive, companies functioning in a saturated market can sell their products at lower prices to gain market share. It results in companies indulging in price wars with one another, continuously underselling to attract customers.

Amazon is infamous for using the price-reduction strategy to drive its competitors out of the market. It is not a sustainable strategy because not only does it impact profitability, but also because demand is not everlasting. The unprofitability of several unicorn startups, such as Grub Hub and Uber Eats, can be attributed to consistently low prices.

 

2. Cost-cutting

Companies often resort to cost-cutting measures when they see stagnating profits. While it may be effective to cut unnecessary or avoidable costs, the strategy does not address the source of the problem. The main driver of reduced earnings is a decline in revenue.

Moreover, there is a limit to cost-cutting. After reaching the threshold, the company will need to rely on revenue for sustained profits. Thus, it is not possible to tackle demand-side problems with supply-side solutions.

 

3. Line expansion

Companies may attempt to tackle stagnating revenue by employing geographical line expansion of the same product. The line-expansion marketing strategy has proven to be successful in stimulating demand. However, due to rapid globalization, most companies have already surpassed the limits of line expansion.

For example, fast-food chains, such as Mc Donald’s, have expanded to a large degree, both domestically and internationally. Moreover, the line-expansion strategy often leads to cannibalization, given that the size of the overall market still remains the same.

 

4. Diversification and innovation

The most effective strategy to counter market saturation is diversification. It allows companies to tap into adjacent markets to expand their potential customer base. Thus, the companies create new customer value, new demand, and, subsequently, new revenue streams.

A successful diversification strategy must focus on innovations to boost demand. The motive must be to create value for customers and not simply to create more products and services. Companies in developed countries can capitalize on their economies of scale and production capacity to expand into developing and emerging market countries.

 

5. Product development

Companies intentionally design some of their products to wear out over short periods of time. It is done in order to boost sales from repeat purchases from customers. For example, companies sell earphones or phone chargers with less durable structures, so customers are forced into repeat purchases of said product.

 

More Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Aggregate Supply and Demand
  • Serviceable Obtainable Market (SAM)
  • Total Addressable Market (TAM)
  • Types of Customers

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!