Understanding the Scarcity Principle in Marketing
If you have ever sat in an introductory economics class at some point in your life, you might be well aware of one key lesson on the law of supply and demand.
It can be roughly simplified down to this; the more scarce a resource is, the more people are willing to give up in order to acquire it and the more common a resource it the less people will be willing to give up to acquire it.
Land, an important factor of production will fetch much more money if the piece is located at the centre of the city than land in the countryside.
But you would most definitely not go out of your way to pay double for a Starbucks coffee on an ordinary afternoon because you can easily get a similar coffee at any of the several Starbucks within your city, unless of course it’s one of those Christmas holiday Frappuccino specials.
When massive diamond deposits were discovered in South Africa in the late 19th Century, British businessmen operating the mines, realising the imminent flooding of the market with diamonds devised one of the most successful marketing campaigns of all times.
De Beers Consolidated Mines Ltd. (now De Beers) was formed and over the decades leading to the campaign in the late 1930s, monopolised the global production and distribution of the semi-precious gem perpetuating the illusion of scarcity of diamonds.
The ‘A Diamond is Forever’ campaign created an emotional association with the gem – a symbol of love, commitment and marriage.
Ever since the demand for diamond engagement rings has been steady despite their relatively low resale value, fuelled by the enduring deception of scarcity.
The number of diamonds in circulation in the world market at any given time is carefully controlled by a few companies.
This is arguably one of the perfect examples of the scarcity principle at play.
WHAT IS THE SCARCITY PRINCIPLE?
The scarcity principle is an economic theory where a limited supply of a product combined with a high demand for that product causes a disparity in the desired equilibrium between supply and demand.
A market is in equilibrium if the quantity supplied is equal to the quantity demanded at the equilibrium price or what is called the market clearing price (determined primarily by the interplay between demand and supply creating in theory a mutually agreeable price between buyers and sellers).
At this point there are neither shortages nor surpluses for a service or good.
However, an equilibrium market is largely hypothetical.
According to economist John Maynard Keynes, markets are most often in some form of disequilibrium due to mismatched levels of supply and demand.
A number of internal and/or external factors can cause the market to fall out of balance such as sticky prices by sellers, long-term structural discrepancies or government interventions.
Looking at the graph for the sugar market above, price Pe (equilibrium price) is the single price that incentivizes suppliers to engage in exchange representing a balance between supply and demand for sugar.
If the price increases to P2, traders will be willing to supply more sugar but consumers may reduce the amount of sugar they consume due to the higher cost of purchase involved.
There will be a surplus (Q2-Q1) existing in the market due to higher amount of sugar supplied causing a market disequilibrium.
Economic theory suggests that in a free market the prices of sugar will eventually fall to Pe since suppliers will be forced to reduce the price to avoid the risk of spoiling the product in storage.
But if the price in the market was P1, consumers would be willing to purchase more sugar (Q2) at the reduced price.
However, since the price is below the equilibrium price, traders will only provide a smaller amount of sugar given that low price might not be able to cover their production costs.
A shortage is created since demand exceeds the quantity supplied resulting in a market disequilibrium. In a free market the price is expected to increase to Pe, the equilibrium price forced by scarcity.
The scarcity principle suggests that the price of a scarce commodity will increase until an equilibrium is reached between supply and demand effectively limiting access to those only who can afford to pay for the commodity.
In this scenario, however, unlike in the case of sugar above where the price reverts to Pe, it is possible that this could lead to an increase in equilibrium price and a reduction in equilibrium quantity. This means that with scarcity, there is an opportunity to make more by producing less.
This principle suggests that humans will consider a scarce commodity to be more valuable as compared to one that is in abundance.
It thus creates a sense of urgency and triggers consumers to act immediately before the commodity is no longer available.
For example, when British Airways in 2003 announced the reduction of London-New York flights from twice daily to only one for the Concorde after it became unprofitable to run, sales took off the very next day.
THE PSYCHOLOGY OF SCARCITY MARKETING
It can be argued that to some extent we generally want something that we cannot have and we absolutely love to flaunt when we have something that others don’t have.
As a marketer, you can take advantage of this desire as a sales tactic to stimulate demand and sales through mystic and enticement.
Rather than just stopping at communicating the value and benefits customers will get from buying your product or choosing your service, it is important to put across your unique proposition and make it clear what is at stake for them if they do not consider your proposal.
Faced with scarcity, customers conduct their own cost-benefit analysis and as a marketer, you will only be successful if they find that the utility derived from purchasing the product or service at the given moment is greater than what they would get if they purchased the same product at a later date, probably even at a cheaper price.
The consumer must be able to see the benefit of obtaining the product is higher than the cost incurred for obtaining it.
In a 1975 study published by the Journal of Personality and Social Psychology, researchers Worchel Stephen, Lee Jerry and Adewole Akanbi wanted to know how undergraduate students would value the same cookies in two identical jars if different quantities were put in them.
The students valued the one in the near-empty jar more highly than the ones in the full jar despite the cookies and the jars being identical.
Given hypothetical explanations for the abundance or scarcity of the cookies in the jars, students viewed those that changed from abundant to scarce as more valuable than those that were constantly scarce.
Cookies that were scarce because of high demand were rated to be more valuable than those that were scarce because of an accident.
Those that were constantly abundant were rated much higher than those that started scarce but later became abundant.
It goes to show that scarcity, especially that resulting from high demand rather than low production, may signal some superior characteristic about the product.
The consumer thinks that other people must know something about the product that he/she does not.
There are two psychology principles associated with this phenomenon.
- Social proof – the assumption that surrounding people have more knowledge about the situation than oneself and as such a fast-selling commodity is seen by the consumer as having great quality.
- Commitment – when someone has already committed themselves to purchase a product or service and find out there is a huge chance of not having it, it makes them want it more.
The rush to purchase a scarce object is a manifestation of Psychologist Daniel Kahneman’s Loss Aversion Theory based on research that suggests the pain of losing something is psychologically almost about as twice as powerful as the pleasure of gaining the same thing.
This is tied up with Sigmund Freud’s Pleasure Principle – people’s instinctive tendency of seeking pleasure and avoiding pain for biological and psychological gains.
SUCCESSFUL UTILISATION OF THE SCARCITY PRINCIPLE
So how has this principle been deployed by brands over the years?
To illustrate how effective incorporating the scarcity principle in marketing your product or service, we take a look at some of the most successful deployments of scarcity in marketing.
In September 2016, the social media app’s parent company Snap Inc., launched Snapchat Spectacles – sunglasses that could record 10-second videos from the perspective of the wearer.
Instead of typically distributing them via their online shop or at stores, Snap Inc. unveiled the new product at Snapbots – smiley Snapchat-themed vending machines that were randomly placed in cities across the US.
This was without prior announcement of the launch generating huge interest online as bloggers and social media influencers kept talking about the unique strategy.
The device was only available on the single day the Snapbot was in your city, attracting huge queues of people trying to beat each other before the machine ran out.
MediaKix projects that by 2020, Snapchat Spectacles will achieve $5 Billion in sales
Pappy Van Winkle
Regarded as one of the finest bourbons in the world, Pappy Van Winkle is the dream for the whiskey connoisseur.
With only 7000 cases produced in a year, whiskey lovers have to part with hundreds of dollars a bottle from the few liquor stores that might be lucky to have purchased a few from the very limited number of suppliers.
Due to its high demand, bourbon aficionados are known to show up in droves for the small chance of buying one in a lottery or auction.
When Japan-based video game company, Nintendo launched the Wii gaming console back in 2006 it was a smashing success, save for the fact that for the next three years the company seemed never able to stock enough units for the US market.
This was a deliberate move to artificially create intense demand by starting off with a low production number ensuring customers would be clamouring to buy a Wii right off the bat.
Wii sold more units in the US than the Xbox 360 and PlayStation 3 combined in the first half of 2007 and became the fastest selling console in Australian history and in the United Kingdom at the time.
Jumping on the 2017 trend of highly Instragrammable unicorn-themed, rainbow-hued food and beverages, Starbucks introduced a pinkish-purple-and-blue coffee-free fruity drink called the ‘Unicorn Frappuccino’ stating it would be available for a few days.
Another successful scarcity marketing campaign executed by Starbucks was the serving of coffee in reusable #RedCups for one day only during the December holiday season which also ran out first angering customers who were forced to drive around to find a store that still had them in stock.
Users would get $0.5 off every purchase with the cup available for $2 from the day after.
As we have observed in the above examples, the principle can typically be used in two broad ways;
- Limited number: The item is in short supply and once it runs out it will not be available.
- Limited time (deadline): The item or service is only available only during the stated period only.
Out of Stock
A classic example of the social proof psychological principle, if a product runs out of stock frequently, customers think that it is popular among the general population and must therefore be of good quality.
For example, British shirtmaker T.M. Lewin online store indicates the design, size and cut of the shirts that are currently out of stock.
A customer is then encouraged to leave their email address to be informed when they restock.
Only ‘X’ Left
As in the cookie jar experiment where a reduction in the cookies led to a higher rating of perceived quality, when you visit applications or websites involving booking of hotels, movies and events, you might have noticed a disclaimer that there are only a limited number of spaces remaining.
This pushes the consumers to make an immediate purchase.
You may have an experience of missing out on a hotel or flight because you waited a few days to book.
Booking.com for example heightens the urgency of making an immediate booking by displaying people simultaneously viewing the same hotel with you and the number of times it has been booked in the last hour.
Spotify’s entry into the US Market after a huge popularity in Europe came as an opportunity to increase their paid membership by limiting entry to the free service to invite-only.
You have to choose either between waiting for an invite or paying for unlimited or premium service.
Smartphone brand OnePlus used a similar strategy to add hype and mystique during launch and to manage demand, selling nearly a million phones from over 25 million invites to their website in the first year without opening a single store.
This technique appeals to our innate attraction to exclusivity and the Fear of Missing Out (FOMO) best illustrated in Steve Whyley’s social experiment with the 11K Club – a mysterious club with only 11,000 slots and one exceptional benefit which you’d only know by joining.
For Limited Users
Similar to the invite-only tactic, marketers can sometimes introduce special offers for certain users only. This creates a sense of longing for those missing out and superiority for that special category of users.
This will typically occur in services with a tier of users such as football club or cinema membership where tickets can be availed first to the top ranked members cascading to the lowest and general public.
For technology products, paid-up users may take advantage of discounts or pre-releases, while free users have to upgrade to enjoy the same.
As we have seen with some of the examples above, limited stock doesn’t necessarily have to be a product of high demand, it can be a deliberate sales strategy.
Remember when Adidas debuted Kanye West’s Yeezy Boost 350 in 2015?
They were completely sold out within minutes of being available for purchase online.
The air of exclusivity attributed to limited edition articles such as watches, leather bags etc. taps into our inherent desire to stand out and acquire status symbols that others don’t have.
Deadline (Limited-Time) Techniques
A flash sale is a discount or a type of promotion where the cost of purchase is greatly reduced than run-of-the-mill discounts, lasting for only a short period of time.
The quantity may be limited as in end of year sales which coupled up with the very low prices triggers the urgency of making an immediate purchase or more accurately, impulse buying.
Even when the product may be available at a later date with little difference in price, the term ‘flash sale’ emblazoned on storefronts or at the landing page of the online store triggers similar urgency.
A retailer can define the scarcity parameters on an e-commerce website by putting a timer or countdown.
The customer is now well aware of how much time is left for them to make a decision and with it comes urgency.
On eBay, for instance, a countdown timer is used to ignite last-minute bidding wars amongst prospective buyers effective driving up the price tag of a scarce item.
A majority of websites have a checkout timer to encourage the user to make a purchase as soon as their basket is full rather than later.
Sale Price Countdown
A countdown timer can also be deployed to emphasize the amount of time left before a product is no longer available at the discounted price.
TigerDirect.com, for example, place a massive countdown timer in addition to their daily sales to trigger a FOMO for the deal of the day which would appear to not be available any time soon after the expiry.
Limited Time Shipping
When Girlfriend Collective launched its website in 2016, the brand offered its social media followers a free $100 pair of leggings for the cost of shipping for a limited time and sharing the link to its website on Facebook to spread the word.
They effectively utilised word-of-mouth to drive traffic to the website.
A countdown can also be leveraged in the context of free or next-day shipping as normally used on Amazon to notify the customer the exact time remaining for the seller to guarantee timely shipping spurring the customer to make a purchase.
The holidays seasons don’t last forever and as such when customers see holiday/seasonal offers they do see scarcity which drives sales.
Some retailers such as Modcloth create special designs available only during the specific holiday such as Christmas sweaters, Starbucks sells pumpkin spice flavoured drinks only in the fall and for a premium too!
CAUTION: WHAT TO CONSIDER
Invoking the Scarcity Principle to sell or promote a promote a product or service can be a very effective persuasion strategy, but it can also backfire horribly as it did for two iOS productivity apps Tempo and Mailbox that released their services to a small group of users similar to Facebook’s fashion but kept others waiting indefinitely.
If you overuse scarcity, it will be a matter of time before your customers catch on after realising you are ‘running out of stock’ every week or hosting flash sales every too often.
Remember what the findings of the cookie jar experiment taught us; a product that is scarce because of high demand and not accident or what we could call artificial sales is rated higher in terms of perceived quality.
This is as compared to items that are consistently scarce from the beginning or those that started off scarce and now are abundant with the latter actually decreasing its perceived value.
In a study published on the Social Behaviour and Personality Journal, researchers found that when consumers interpreted scarcity claims as a sales tactic, it’s positive on consumer purchase decision are diluted.
In line with the cookie jar experiment, Aggarwal, Jun and Huh in a 2013 article on the Journal of Advertising observed that limited-quantity messages are more effective than limited-time messages in influencing consumers’ purchase intentions.
It is important to note that scarcity alone will not net you your desired sales levels alone, it has to be used in combination with other factors including a great, well-differentiated product design and a proper market assessment.
One important consideration is the knowledge you have about your target audience.
Can they get by with alternatives?
If this is a possibility, what unique feature does your product or service have?
Would your customers be motivated by scarcity or could they resent it?
According to the scarcity people, people will ascribe greater value to an item that is in short supply and lesser value to an item that is in abundant supply.
As a marketer, you can take advantage of the scarcity principle to drive the sales of your products by creating artificial scarcity.
When doing this, however, it is important to make your artificial scarcity seem authentic, else customers will see through your games and perceive your products as less valuable.
After tons of meetings, follow up emails and numerous phone calls, you finally got the contract …