scarcity-principle

What Is The Scarcity Principle? Scarcity Principle In A Nutshell

The scarcity principle is an economic theory positing that scarce goods which are also in high demand cause an imbalance in the supply and demand equilibrium. However, it can also be applied to consumer and social psychology, and it is these applications that we will discuss in the rest of this article. The scarcity principle posits that the more difficult it is to obtain a product, the more valuable that product then becomes.

Understanding the scarcity principle

With that said, the scarcity principle states that consumers value something more if it is scarce. A similar definition was provided by author Robert B. Cialdini in his acclaimed book Influence: The Psychology of Persuasion. He noted that “opportunities seem more valuable to us when their availability is limited.”

In the context of consumer purchase behavior, the scarcity principle is a motivator. Since consumers believe the scarce product will soon become unavailable, they value it more and are more likely to purchase it when compared to a situation where the product is abundant. Armed with this knowledge, brands use the scarcity principle to manipulate consumers into purchasing their products.

Why is the scarcity principle effective?

Cialdini suggests there are two main drivers of the scarcity principle.

1 – Consumers create mental short-cuts to deal with a complex world

Otherwise known as heuristics, these mental-short cuts are used to estimate the value of an item based on its scarcity. Rare items that are difficult to obtain are assumed to be worth more than abundant items that are easier to obtain. 

This heuristic is valid most of the time, but in some cases, it is invalid. 

2 – Scarcity limits opportunities, which reduces the freedom to choose

For better or worse, humans evolved to react when freedom of choice is limited or reduced. This is a survival instinct stemming from the fact that the impact of a loss is more severe than the impact of a comparable gain.

As a result, consumers are always on the lookout for potential losses and are hardwired to keep their options open. Fewer options mean less freedom of choice and the risk that as resources become less available, they may not be available at all in the future.

Whenever freedom of choice is threatened, the need for the consumer to retain their freedom makes them desire the product even more. As access to a product is threatened, in other words, the consumer makes a concerted and vigorous effort to possess that product

Examples of brands that used the scarcity principle

Let’s conclude this article by having a look at some case studies where the scarcity principle has been used effectively:

Nintendo 

nintendo-business-model
Nintendo is a Japanese consumer electronics and video company founded in 1889 as Nintendo Karuta – a manufacturer of decorated, hand-made playing cards. By the 1980s, the company made significant investments in a rising technology: video games. It then produced popular titles like Donkey Kong and, later on, Super Mario Bros. Today Nintendo generates revenues through video game franchise sales, e-commerce, and the Unfold System.

When the Wii was released in 2006, mass hysteria ensued as consumers clamored to purchase one. This continued for three years before the supply was comparable to demand. 

To increase scarcity, Nintendo capped production volume over that period and advised consumers to “stalk the UPS driver” to determine when a new shipment of Wiis was about to be delivered.

Starbucks

starbucks-business-model
Starbucks is a retail company that sells beverages (primarily consisting of coffee-related drinks) and food. In 2018, Starbucks had 52% of company-operated stores vs. 48% of licensed stores. The revenues for company-operated stores accounted for 80% of total revenues, thus making Starbucks a chain business model

The coffee chain announced the Unicorn Frappuccino in April 2017 via an Instagram post with the caption “Available for a limited time at participating stores in the US, Canada & Mexico.”

The hashtag #unicornfrappuccino was posted nearly 160,000 times in response to the perceived value of the novel, time-limited beverage.

Groupon

Groupon is a two-sided marketplace where local consumers meet deals from local merchants. The company makes money by selling local and travel services and goods. Its value proposition based on attracting local customers to local merchants is quite compelling. Local consumers instead get savings and discounts that they would not get elsewhere. The company measures its financial success in gross billings and revenues growth. Groupon generated over $2.8 billion in 2017, by selling its goods and services directly via its websites and mobile app, and indirectly via third-party affiliate sites, who get a commission for each sale.
Groupon is a two-sided marketplace where local consumers meet deals from local merchants. The company makes money by selling local and travel services and goods. Its value proposition based on attracting local customers to local merchants is quite compelling. Local consumers instead get savings and discounts that they would not get elsewhere. The company measures its financial success in gross billings and revenues growth. Groupon generated over $2.8 billion in 2017, by selling its goods and services directly via its websites and mobile app, and indirectly via third-party affiliate sites, who get a commission for each sale.

Discount service platform Groupon is a master of using the scarcity principle to persuade consumers to take advantage of its offers.

Like Starbucks, scarcity is created because each deal is available for a limited time only. Groupon uses social proof as an extra motivator, displaying the number of consumers who have purchased the deal and rated it highly. Humans interpret scarcity combined with social proof to mean that the product must be worth having since most others appear to be purchasing it.

Booking.com

booking-business-model
Booking Holdings is the company the controls six main brands that comprise Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com, and OpenTable. Over 76% of the company revenues in 2017 came primarily via travel reservations commisions and travel insurance fees. Almost 17% came from merchant fees, and the remaining revenues came from advertising earned via KAYAK. As distribution strategy, the company spent over $4.5 billion in performance-based and brand advertising. 

Online reservation platform Booking.com allows users to book a range of accommodations including hotels, apartments, holiday homes, and motels.

For applicable properties, Booking.com shows the number of rooms left with additional text highlighted in red such as “Only 2 rooms left at this price on our site” or “3 other people looked for your dates in the last 24 hours”.

Key takeaways:

  • The scarcity principle posits that the more difficult a product is to obtain, the more valuable that product then becomes. In the context of consumer behavior, the scarcity principle motivates the consumer to purchase.
  • The scarcity principle is caused by consumers creating heuristics in an attempt to value items accurately. Scarcity also reduces freedom of choice which causes the individual to desire the product even more.
  • The scarcity principle has been used by many brands to successfully market their products. These include Starbucks, Groupon, Nintendo, and Booking.com.

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