Whether you’re launching a new business or operating an existing business, market saturation is often a daunting challenge. Crowded with established brands and innovative competitors, you might think it’s impossible to penetrate an oversaturated market. However, market oversaturation offers distinct advantages over unproven markets: a clear indication that there are ready buyers, as well as clear signals about where opportunities lie—if you know how to read them.
What Is Market Saturation?
A saturated market occurs when existing businesses meet all the current demand for a product or service. Market saturation often happens when multiple businesses are offering similar products or services to the same customers.
What does oversaturated mean? To understand this concept, think of a market like a pizza cut into 12 slices, representing the potential customers in the market. There are four existing businesses competing for the same customers, and each business has three slices of the pizza (25 percent of the customers). When a new business enters the market and competes for the same customers, the business must take a portion of the customers from existing businesses in the space, because all the pizza slices (potential customers) are accounted for. If the business successfully takes over about one-third of the market, the four existing businesses will lose one or more slices of pizza, or portions of their customer base.
Of course, there are many potential outcomes in this scenario. A new business may only take over a small portion of the existing customer base from one or two existing businesses while the other existing competitors maintain their market share, or it may acquire nearly all the customers in the space, forcing existing businesses out of the market.
Types of Market Saturation
Knowing how to tell if a market is saturated is important for any entrepreneur. There are two primary types of market saturation: microeconomic market saturation and macroeconomic market saturation. Understanding the kind of market oversaturation you’re experiencing can help you identify the causes of decreased demand and uncover potential solutions. Here’s a look at the two types of market saturation.
Microeconomic Saturation
Microeconomic market saturation occurs when the demand for a business suddenly disappears. In the pizza example, if a new business enters a market and acquires all the customers previously served by one of the four existing businesses, that existing business is left with no slices of pizza. The new business now has three slices of pizza, serving the 25 percent of customers once served by the existing business.
For instance, if a new coffee shop opens down the street from an existing coffee shop, and the existing coffee shop’s customers begin frequenting the new coffee shop instead, the existing coffee shop is facing microeconomic saturation.
Macroeconomic Saturation
Macroeconomic market saturation occurs when the demand for services or products decreases across an entire industry. This type of market oversaturation often happens when new technology makes existing products or businesses obsolete or when existing businesses have already met the needs of all possible customers.
In the pizza example, macroeconomic market oversaturation would happen when all 12 slices of pizza have been eaten (i.e., potential customers have already had their needs met or otherwise are no longer seeking the services or products).
One real-world example of macroeconomic market saturation is the rise of streaming video on demand (SVOD) services. The new technology introduced convenience and a growing breadth of content to customers accustomed to driving to their local video store to rent DVDs, providing a more convenient and easily accessible solution.
6 Tips to Overcome a Saturated Market
If you’re wondering how to stand out in a saturated market, the good news is that it can be done. However, standing out in a crowded market is a challenging task. First, understanding how to tell if a market is saturated is key. Once you’ve identified the cause of market saturation, you can uncover opportunities to differentiate your business from the competition. However, you must be prepared to face several challenges and overcome them to earn a piece of the market share and establish your business as a leader.
Here are a few strategies you can use to penetrate an oversaturated market.
Tap Into Change
The key to success in a saturated market, according to Seena Sharp, founder and managing director of Sharp Market Intelligence, is change. “Change is a synonym for opportunity. If you don't know what's changing—with your customers, competitors, distribution channels, alternative uses, features and more, your customers will buy from those who do,” she says. And that’s precisely where new businesses have an edge.
“New companies often recognize the gaps that established businesses don't. If they're correct, they gain customers and grow,” Sharp says. “The challenge is not to become like the established businesses who think they know better than the customer. This applies to B2C, B2B and nonprofits.” Larger companies that have been in business for decades are sometimes set in their standards, and it’s more complicated to modify long-standing practices. Small businesses with less rigidity and a smaller organizational hierarchy can often make quick decisions and turn on a dime.
Deliver Value-Added Service
In any entrepreneurship course, you’ll be advised to choose a business model and figure out how to do it differently or better than existing companies. In some cases, though, you might already be in business and experience a sudden boom in competition, leading to market saturation. That was the case for Kyle Willis, CEO of No to the Quo.
“I started my social media consulting company [...] when Facebook advertising was just kicking off and businesses were finally utilizing social media as a viable marketing channel,” Willis says. “Social media managers came out of the woodwork and everyone called himself a social media expert.”
Even though he had previously served as a national account manager for a social network, Willis needed a competitive advantage to stand out in the oversaturated market. So he offered low-entry, no-commitment contracts to clients who wanted to see if social media was a viable marketing tactic for their companies. “If clients weren't happy with my work or they didn't receive what they expected, then they weren't locked into any long-term contract and could cancel immediately.”
It was an incentive for clients to try No to the Quo over other social media consulting agencies that required long-term commitments. “This required me to constantly be delivering great results and make sure that I exceeded their expectations,” Willis says. Once clients experienced success with No to the Quo, Willis earned their business over his competitors and overcame the challenges of market oversaturation.
Differentiate Your Business
If you’re really good at keeping your finger on the pulse of the industry and the waves of change, that often sets you apart from the competition. Small businesses that differentiate themselves are able to thrive in the most competitive environments and the most oversaturated markets.
“My advice is to do your homework, define what makes you different and embrace that difference wholeheartedly,” says Bob Myhal, CEO of NextHire. By differentiating your business, you can tackle market saturation and capture a greater share of the customer base.
Find Your Niche
You can make a name for your business in an oversaturated market by catering to a specific subset of the target audience. Industry niches are commonly overlooked in favor of winning over customers using strategies like promotions and discounts, leaving specific niche customers with unique needs that haven’t been met yet by other businesses in the market. These customers may be purchasing products or services from existing businesses only because there isn’t an option that adequately addresses their specific needs, and that’s where your business comes in.
To use this strategy to overcome market oversaturation, identify the common problems your target audience faces that aren’t solved by existing products or services or specific use cases that they aren’t designed for. If you can work an angle and cater to these unique needs, you can win over customers by filling a gap and giving them what they’ve been missing from your competitors. Software-as-a-Service (SaaS) companies often use this strategy by designing feature sets that cater to customers in specific industries.
Price Effectively
Pricing is a key differentiator for businesses in every industry, and when you’re experiencing market saturation, it can be tempting to simply cut prices to attract buyers who are looking for the lowest possible cost. However, pricing effectively to overcome market oversaturation doesn’t necessarily mean you need to have the lowest prices. In fact, lowering prices to undercut your competition can reduce your profitability or even cause you to lose money. Instead, consider different pricing models and how they might appeal to your target audience.
For example, you might offer bundled services that can help your customers save money, or you might allow customers to customize a package of products and services that meet their needs, meaning they’ll be paying only for services or features they need and not those they don’t. Likewise, pricing tiers allow customers to choose a level of service that meets their needs without paying for more than they need, which can be a valuable competitive differentiator in an oversaturated market.
Personality
Your brand personality should resonate with your target customers. Different approaches, brand voices, tones and styles appeal to different people, so refining your brand voice and personality to appeal to specific types of buyers will help you attract customers in an oversaturated market.
Market saturation means you’re competing against multiple other businesses for the same target customers, but today’s consumers increasingly prefer to do business with companies that align with their personal values. This is particularly true for younger consumers. When you’re experiencing market saturation, making your brand values known and showcasing your brand personality to resonate with your target audience will help attract your ideal buyers.
No matter how crowded your industry, even if it’s full of major brands, you can achieve success in an oversaturated market by setting yourself apart. Whether that means reinventing industry standards, taking a new approach to the business model or offering something customers can’t refuse, carving a niche in the most oversaturated market is possible with commitment and creativity.
A version of this article was originally published on January 9, 2015.
Photo: Getty Images