New businesses are opening all the time in several industries such as technology, consumer goods, financial services and healthcare. This explosion of new players increases competition and squeezes profit margins and makes customer acquisition more difficult. In some sectors, the sheer volume of player has caused oversaturation: a situation where supply constantly exceeds demand.
This article will discuss market saturation – its drivers, business impact and warning signs that your industry is oversaturated. Expert insights and real life case studies will show you how to adapt to and even thrive in a crowded competitive landscape.
What is Market Saturation?
Market saturation occurs when the quantity of goods and services delivered by businesses chronically exceed consumer demand in that sector. Oversaturation is caused by low barriers to entry and floods of new market players attracted by seemingly endless profit opportunities.
However, customer demand cannot grow indefinitely. At some point, most buyers interested enough in buying the item have access to it already. Now each business is competing for a piece of a slowing or stagnant consumer base. Companies cannot afford to attract new customers and thus reduce margins and possibly create disruptive and unsustainable price battles.
Technological changes and innovation may also accelerate market saturation. For example, the explosion of new companies with new capabilities has created an abundance of emerging companies across sectors. This dynamic has affected media and retail as well as transport.
In summary, oversaturation occurs when the competitive landscape grows faster than market fundamentals can support it. The choice for businesses is whether to fight for diminishing returns or simply to refocus on positioning, differentiation and delivering better customer value.
Effects of Oversaturation: Challenges for Businesses
Operating in a highly competitive, oversupplied sector creates serious headwinds. With industry growth slow or negative, the focus is on capturing market share from competitors. Cost leadership or carving a niche are prerequisites for success.
This dynamic squeezes profit margins in several ways:
Lower Prices: Competitors chasing customers drive down prices across the board. Firms that resist a destructive “race to the bottom” cede share of market share.
Higher Marketing Costs: In saturated sectors, a new customer can be acquired for a very high price via ads or promotions. Businesses have to spend more on the tiny marginal returns on the marketing investment.
Excess Inventory: Forecasting demand is almost impossible when supply keeps pace with purchases. The result? Stock excess that must be sold at a loss.
Stunted Investment: To stay financially viable with squeezed margins, companies limit spending on innovation, expansion and other investments critical to long-term competitive advantage.
Tips for Surviving and Thriving in Saturated Markets
Once market saturation sets in an industry, grabbling for big profits becomes a thing of the past – often for good. Expectations have to be reset for more modest, sustainable returns, so executives must now pilot their organizations to find a sustainable customer base.
Here are four overarching approaches can pay dividends in crowded sectors:
- Superior brand positioning
- Differentiation through innovation
- Market expansion into new geographies and segments
- Embrace of technology and digital channels
Wrapping Up
New business launches continue to soar as digital tools make company formation faster and easier than ever before. This low barrier environment entails increased risk of market saturation across sectors. However, with the right approach, businesses can still thrive in a saturated market.