Will you marry me? With an outstretched arm the man slowly opens a box and the woman’s mouth drops open and tears fill her eyes. Inside the little box is a ring with a clear rock glistening in a the evening light. The rock, of course, is a diamond. In our society it’s by far the most common symbol of engagement. It’s the most common, because it’s scarce.
Imagine for a moment the exact same gesture with the exact same depth of love but inside the box is glass bead rather than a diamond — the kind that you can buy at any mall. It’s beautiful. But it’s not rare. Because they’re easy to produce, the glass bead costs $3 while the average cost of an engagement ring is $3500. Three dollars is not what you’d spend on something that is intended to be a symbol of love throughout your lifetime.
Of course this isn’t a very romantic exercise. Nobody wants to have a symbol of their love analysed with dry economic rationale. For god’s sake, you could take that $3500 and use it for a trip. A downpayment on a car. New appliances for your kitchen! But don’t go there. Love is rare. Love is forever. The appropriate symbol is a diamond even though only an expert can tell the difference between a diamond and synthetic Cubic Zirconia.
This is just an illustration of the most basic rule of economics — the rule of supply and demand. Diamonds mined from the earth are rare and there’s high demand so the price reflects this reality. Cubic Zirconia is man-made and therefore much more plentiful. So people across the world are paying a premium for something they can’t perceive in any tangible way, but they care about deeply anyway: what they have is rare and therefore exceptionally special and valuable.
Think about this from a business perspective. The diamond cartel, operated by DeBeers, goes to great lengths to carefully control the supply of diamonds so they can control the price. They control scarcity.
While not the same as a diamond cartel, companies are often suspected of creating false scarcity to drive up demand. Here’s an excerpt from “‘Tis the Season for Product Shortages” by Darren Duber-Smith:
A false product shortage is a form of artificial scarcity induced by a supplier, often with the intent to elevate consumer demand above levels that may otherwise be achieved in the absence of such scarcity. Companies may induce a false shortage to give rise to a common perception of the rarity or uniqueness of a product or service, when they are, in reality, neither precious, nor difficult to produce. Suppliers often stand to gain from a false shortage, because it can help increase consumer demand without a corresponding decrease in price, and hence an entity’s perceived value. This results in an increase in short-term profit.
Duber-Smith claims that Apple and other companies make an effort to control supply. While any given story may or may not be true (he doesn’t cite third-party sources), it’s definitely the case that marketers can drive demand by creating the perception of scarcity.
In his article, “How to Manipulate Supply and Demand” Wayne Mullens provides a similar observation about perceived demand (which is the corollary to perceived scarcity):
People like purchasing and doing business with those that are in demand. Think Apple, Lamborghini, the hottest club in L.A., Hotel Zaza, and Richard Branson. All are in demand. Everyone wants to have one, or be associated with them. If you carefully examine each, you’ll discover that all have very premium prices associated with them. They have all successfully manipulated the law of supply and demand by manufacturing demand.
For marketers and sales people, scarcity can be a powerful tool. Trying to artificially control supply, however, can undermine the trust in your brand. Think about the age-old tagline “act now while supplies last” and “offer good for a limited time only” do they have any impact whatsoever? At this point they sound stupid. Even restaurants and bars that have the good fortune of excess demand are rightfully concerned about turning away potential customers. And the reality is it’s unlikely that Apple constrained supply to the point where people turned to other options. It’s just bad business.
So how do you walk the right line along the supply and demand curve?
1) Be accessible. Even if you’re time is in high demand, you can still be accessible. Ironically this is actually the best way for people to discover you and realize that you’re a rare resource. It’s a variation the give-to-get marketing technique that I described in this post. A great example of this is David Meerman Scott. He’s a well-regarded author and speaker, but he still responds to posts on Twitter, comments on his blog and other techniques he uses to interact with large numbers of people. This concept of “scaling your presence” is essential in the new landscape of social media.
2) Be honest. If you actually have three different job offers then that may make you more desirable and give you and edge negotiating a salary, bonus, or expanded role. If it’s not true, however, that will likely catch up with you. The same goes for sales. Don’t stretch the truth or describe your product or service as something beyond what you can deliver.
3) Be zen-like. The best advice I’ve ever received for negotiation is “know the point (or price) at which you’re comfortable walking away.” This applies whether you’re working on a huge business deal or pursuing your dream house. If you know the point you’re willing to walk away, you can effectively turn yourself into the scarce resource. This isn’t always easy, but it’s worthwhile to play out various scenarios in your mind to understand how much you’re willing to pay or what points you’re willing to relinquish before you just say no. This approach takes the emotion out of supply and demand.
4) Be attuned. After meeting Daniel Pink and reading his book To Sell is Human “attunement” is my new mantra. Empathy is not a new concept for relationships, but for some reason it hasn’t been emphasized in sales. Making a concerted effort to see things from the other person’s perspective leads to much better outcomes for negotiations.
5) Be unique. Every marketing person strives for product differentiation. It’s important to note that differentiation isn’t just related to product features. It’s the advice you give. It’s the bond you create. It’s the support you provide. If you’re unique, by definition you’re scarce.
Addendum: See “A Tale of Two Theories” by Ron Baker. His subtitle “why are diamonds more valuable than water” serves as a nice complement to this point.