Why Scarcity May Be Your Best Competitive Advantage
BY Jon Burgstone
When customers have to struggle to get their hands on something, they value it more--and they'll pay more to get it.
Every entrepreneur needs to develop a competitive advantage. Here's one to try: Make your product scarce--and charge a premium for it.
This strategy can work well for several reasons. First, consumers tend to associate limited quantity with higher quality. This is a heuristic that's been developed over a long period of our history, and is usually helpful. If a given item were not more valuable, then why would there be so few on the shelf? Often this is how people justify spending more money for "quality" products. And second--not surprisingly--selling premium products can generate much greater profit margins.
Let's look at an example. It's summertime, and many people are thinking about taking a vacation. Everyone would like to get away for a week, (or even two!), to relax, spend time with family or friends, and enjoy some fun.
For a look at how the scarcity example works in the tourist industry, consider one of the more exclusive vacation destinations in the U.S.--Nantucket Island. The former whaling colony is located 30 miles off Cape Cod, Massachusetts, and offers many miles of sandy oceanfront beaches as well as a quaint historical town area. Visitors can only travel there by ferry, private boat, or airplane. Right off the bat, that brings scarcity to the island--it's simply difficult to get there.
Most accommodations are weekly house rentals, not hotels. Once you arrive, you'll find there are almost no chain restaurants or stores.
And vacationers pay quite a premium for this scarcity! Go to the local market, and you'll fork over $20 for a simple fruit pie. Visit the local coffee shop, and you may need to wait 30 minutes in line for your drink--which people happily do. That's because of scarcity, both of the idyllic location, and the lack of many alternatives on the island.
So who goes to Nantucket, an enjoyable place, but also a destination where basics such as a coffee shop are scarce? A lot of vacationers pay a lot of money for the opportunity. Ferryboats this summer are packed with tourists. The airport is brimming full with private jets. The most expensive house for sale in Massachusetts is located on the island for $59 million. And the lucky buyer of that property will be able to count such luminaries as Eric Schmidt (Google), Tommy Hilfiger, Roger Penske, Bill Frist (former U.S. Senate Majority Leader), Jack Welch (General Electric), and Chris Matthews (MSNBC host) as fellow inhabitants.
So think about scarcity as an important entrepreneurial advantage. Nantucket businesses have learned this lesson, and the people of the island take great pains to preserve the place as it is--even with the transportation hassles and slow coffee shops. Visitors pay large premiums, in money and time, to enjoy this scarcity. After all, if so many other people want the same thing, then it must be valuable. Right?
JON BURGSTONE was co-founder of SupplierMarket, acquired by Ariba for $1.1B. He now teaches at Berkeley, where he helped launch the Center for Entrepreneurship & Technology. He is co-author of Breakthrough Entrepreneurship. @jburgstone