Profit from Scarcity

from Harvard Business School professor, John Quelch:

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. 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?