Tuesday, July 10, 2007

Scarcity

I’ve been thinking about scarcity lately, specifically in the design of new business models. All companies fundamentally seek situations where demand > supply, particularly if their supply – be it products, services, knowledge, or a combination thereof – is scarce. As demand increases, supply decreases, and scarcity galvanizes, you can charge more for your product or service. Elementary stuff.

Real estate is a cardinal example. Developers seek to create urgency (fear?) through perceived scarcity of a specific property, investment opportunity, or pricing. Scarcity can scare potential buyers. We just returned from a weekend in Tahoe where we enjoyed a tour and complementary stay at a resort. “We can’t build and sell them (the properties and fractional interests) fast enough,” our salesperson offered. My wife and I sensed sincerity in his assertion that, combined with the desirable opportunity, fostered several emotions: An urgency to get in at an opportunistic price for a perceived scarce offering. We did not buy on the spot, but our emotive strings were strung.

Scarcity in real estate also reminds me of a few-seasons-ago Sopranos episode. Tony and his cronies were dining with a young investment advisor who had recently orchestrated a profitable deal. “So, kid, tell me, what else you got,” Tony asked. “Buy land,” the advisor suggested. “God isn’t making any more of it.”

Scarcity is also analogous to deprivation. Remember the Got Milk? ad campaign? Milk is a commodity; it’s anything but scarce. And, marketing a commodity is a tooth-yanking, migraine-inducing bore. Got Milk? got it. The campaign’s advertisements personified situations where people were deprived of milk: inhaling a peanut butter sandwich, prepping a bowl of cereal, opening the fridge in a thirst-quenching quest. Deprivation of a scarce commodity germinated demand.

Here’s another example. In 1980 two Minnesotans had an idea. What if we could liquefy soap and sell it in containers with pump-top dispensers? Like bottled water – think about how, 20 years ago, non-bubbly bottled water did not exist – the idea was too simple. So simple that the entrepreneurs worried about, post-creation, big consumer packaged goods companies (e.g., P&G) entering the market. What to do? They (Minnetonka Corporation) acquired an 18-month worldwide supply of pump-top dispensers and plunged in with their first product: Soft Soap. When the big boys sensed they were on to something and tried to enter the market, they were stunted; Minnetonka had cornered an essential (and scarce) resource, buying enough time to create the market and build necessary momentum.

Finally, a demand > scarce supply = fortune economic pearl from Emerson, circa 1855:

I trust a good deal to common fame, as we all must. If a man has good corn, or wood, or boards, or pigs, to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods. And if a man knows the law, people find it out, though he live in a pine shanty, and resort to him. And if a man can pipe or sign, so as to wrap the prisoned soul in an elysium; or can paint landscape, and convey into oils and ochres all the enchantments of Spring or Autumn; or can liberate or intoxicate all people who hear him with delicious songs and verses; ‘tis certain that the secret cannot be kept: the first witness tells it to a second, and men go by fives and tens and fifties to his door. What a signal convenience is fame.

++++++
Post-script (8/20/07): Interesting piece in today's Freakonomics blog about bottled water vis-a-vis soft drinks. Building on the above, think about a pair of entrepreneurs two decades ago with a prospect: We're going to fill plastic bottles with two parts hydrogen and one part oxygen, and we'll sell it for a buck a bottle at 7-11! Fat heads (VCs) unite: These guys are nuts.

Post-script II (8/31/07): One of my favorite marketing minds, Seth Godin, chimes in with a replay of a four-year-old take on Scarcity: The Scarcity Shortage. Synopsis:
So what's scarce now? Respect. Honesty. Good judgment. Long-term relationships that lead to trust. None of these things guarantee loyalty in the face of cut-rate competition, though. So to that list I'll add this: an insanely low-cost structure based on outsourcing everything except your company's insight into what your customers really want to buy. If the work is boring, let someone else do it, faster and cheaper than you ever could. If your products are boring, kill them before your competition does.

No comments: