14 Sep 2007  Research & Ideas

How to Profit from Scarcity

This past summer's launches of the iPhone and final Harry Potter book were textbook examples of companies profiting in part by creating the illusion of scarcity. Professor John Quelch explains the advantages of this strategy when executed well, and tells how to recover from a real product shortage. Key concepts include:

  • Marketers understand that using the illusion of scarcity can accelerate demand by encouraging us to buy sooner and perhaps to buy more than normal.
  • Using false scarcity as a strategy also carries risk: it invites heightened scrutiny and frustrates buyers.
  • Even if you experience a real product shortfall, take steps to mitigate potential disaster.

 

Editor's Note— Harvard Business School professor John Quelch writes a blog on marketing issues, called Marketing Know: How, for Harvard Business Online. It is reprinted on HBS Working Knowledge.

Marketers are trained to match supply to demand. Everything that consumers need should be available at the right time in the right place at the right price. Coca-Cola's mantra always has been to be within an arm's reach of desire. To be out of stock is to lose a sale or, worse, to lose a sale to a competitor.

But marketers also understand that, by using the illusion of scarcity, they can accelerate demand. This false scarcity encourages us to buy sooner and perhaps to buy more than normal.

We saw two excellent examples of this effect this summer with the launches of the iPhone and the seventh Harry Potter book. In both cases, the pre-launch publicity was designed not only to fuel demand but also to create the illusion that supplies would be limited. In fact, there were very few supply shortages. In both cases, the marketers anticipated demand levels pretty well.

As the mountains of press coverage and strong opening day sales attest, the scarcity illusion strategy paid off for Apple and Potter's publishing company. It wasn't just direct sales of these two products that benefited from the scarcity illusion, however: The heavy crowds drove sales of related products in Apple stores and bookstores during a relatively slow sales month.

But there are risks to using false scarcity as a strategy. First, hype invites heightened scrutiny: Common first-version shortcomings of the iPhone fueled negative reviews that were then amplified by the blogosphere. Second, some consumers, frustrated by waiting in line, may have given up or switched to other alternatives.

Creating the illusion of scarcity can be a smart marketing strategy.

Creating the illusion of scarcity is a far different situation than marketers genuinely underestimating demand for a new product. One well-known example of this misstep occurred in 1998, when Volkswagen under-forecast demand for the New Beetle in its launch year. Of course, ramping up production of a car is more challenging than printing an extra run of a book. But after its initial error, VW made some smart decisions to mitigate the damage.

First, the company rewarded their best dealers by making the scarce New Beetles available to them first on preferential terms.

Second, VW factories "fully loaded" the New Beetles with options to maximize the unit margin that VW and the dealers extracted on each vehicle.

Third, VW incented its dealers to stock up on non-scarce cars such as Golfs and Jettas as a quid pro quo for receiving scarce New Beetles. Consumers drawn to VW dealers to look at the New Beetle often ended up buying other VW models more suited to their specific needs. In this way, the scarce product acted as a brand magnet for the entire product line.

As the examples above illustrate, scarcity can be a blessing or a curse. Creating the illusion of scarcity can be a smart marketing strategy. And even if you're in the unfortunate position of experiencing very real scarcity, there are tactics you can employ to minimize the brand damage and even profit from the error.

What's your scarcity story? Has your company been caught flatfooted in a scarcity situation or has it successfully manufactured the illusion of scarcity to accelerate demand?

Join the discussion on Harvard Business Online.

About the author

John Quelch is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School.