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Rabbi Avigdor Miller once marveled at the notion that “two gases [hydrogen and oxygen] — neither of which can quench thirst – can be united into a clear and sparkling liquid which pours down one’s throat in a life-giving stream.” He added that “No liquid in the world can take the place of water for relief of thirst. This fluid is the most potent of all elixirs, although its availability and its inexpensiveness cause it to be overlooked. It is the universal solvent and the vehicle of digestion and of blood circulation. If water could be obtained only from the pharmacist, it would be the most costly of liquors, both for its vital properties and for its enjoyment.” And yet, most likely very few in the U.S. open a faucet and marvel as water pours out… precisely because it is so abundant and available.
Yet, in places like Somalia, South Sudan, Nigeria, Yemen and even places in the U.S. such as Flint, Michigan and drought-affected parts of California, water is very scarce and the cost (and value) of water has skyrocketed. In such places, people have a genuine and profound appreciation for clean drinking water. That’s because the value of everything is deeply affected by abundance or scarcity, whether the item is essential for life or not. In the U.S., the abundance of water has caused the value of “this most potent of all elixirs” to be mostly taken for granted. On the other hand, other commodities that are not essential to life – such as diamonds, gold, rhodium, platinum, plutonium, taaffeite, tritium, painite, californium – are highly valued because of their scarcity, even if they have no life-giving properties. This value is subjective. This is known as commodity theory, and it is something that every entrepreneur, business leader, and sales professional should understand thoroughly. This is where the laws of economics and the actions of sales and marketing professionals meet.
What is Commodity Theory?
Timothy C. Brock, a professor at Purdue University, developed the concept of “commodity theory” in 1969. Commodity theory holds that “any commodity will be valued to the extent that it is scarce, unavailable, or difficult to attain.” Brock went on to do a number of studies on consumer behavior and scarcity. Other scientists also did studies that validated Brock’s theory, applying it to consumer products: women’s apparel (Fromkin 1970), cookies (Worchel et al. 1975) cookbooks (Verhallen 1982), and paintings (Lynn 1987). Those studies all concluded that adding scarcity to items that already have a positive subjective worth increased their value. But there were exceptions to the rule. That begs the question, does commodity theory apply to all products? And does it apply to services?
Brock focused on the psychological effects of scarcity. His theory stated that “scarcity enhances the value (or desirability) of anything that can be possessed, is useful to its possessor, and is transferable from one person to another.” One study Brock conducted examined the effects of two types of scarcity on the attitudes of consumers toward products. He looked at “scarcity due to supply (e.g., “limited edition”) and scarcity due to demand (e.g., “only a few units remain”).” Study results showed that a positive scarcity effect depended on whether the item was suitable for conspicuous consumption. For example, if a product was suitable for conspicuous consumption (such as a diamond ring, fur coat or a luxury vehicle) then the signals of scarcity due to limited supply were beneficial. A bottle of 1811 Château d’Yquem white wine has an astronomically high price tag because of its exclusivity. In 2011, the 1811 Château d’Yquem actually broke the world record for the most expensive bottle of white wine when it sold for $130,000! It is one of only 10 bottles of this wine remaining in the world.
However, when those same types of products were considered to be scarce due to high demand, then scarcity was not beneficial. In other words, people are more likely to want the new Tesla Model 3 electric car because only a limited number will be available when it is first manufactured next year. Lack of availability will work to drive up value of the item. But if the reason it was scarce was because the manufacturer already sold 10 million, making it a very common car, then that kind of scarcity would not be beneficial. In fact, the fact that it was common might turn people off.
On the other hand, if a product wasn’t suitable for conspicuous consumption — such as ubiquitous items like vacuum cleaners or laptops — then signals of scarcity (if the item was perceived to be in high demand) was beneficial. People want to buy a laptop that everyone else is buying or a vacuum cleaner that is a best-selling product. That’s why water (not a conspicuous consumption product) has little perceived value in places where it is available in abundance and very valuable in places where it is scarce
Scarcity and Consumer Behavior
Another interesting experiment was conducted to test two things: 1) how the degree of availability (not available, somewhat available or very available) and 2) the cause of scarcity (accidental unavailability, unavailability due to popularity, unavailability due to limited supply and unavailability due to both limited supply and popularity) affected the choice between three recipe books. In this simulated product test of a fairly ubiquitous item (a recipe book), testers found that commodity theory was valid only for products that people found attractive. For those who didn’t like the look of the recipe books, the effect of scarcity was reversed. The people in the study avoided choosing a scarce product that they didn’t find attractive, which could be perceived as an altruistic motive to leave something scarce for those who might want it.
As a follow-up, a second experiment was designed to test the effect of: 1) availability (attainable, unattainable changed to attainable and unattainable) and 2) the cause of unattainability (accidental, popularity, limited supply and both limited supply and popularity) on a similar kind of choice. The results again found that commodity theory was valid only for those attracted to the item, and only in the restricted attainability situation. That means that just because a product is scarce – or perceived to be scarce – is not enough to drive demand. Scarcity of something a person doesn’t find appealing is not going to suddenly make it so desirable that they want what they didn’t want before.
But how is choice affected by scarcity (or just the appearance of scarcity) when several products are shown at one time? Rebecca Ratner, professor of marketing at the University of Maryland’s Robert H. Smith School of Business, and Meng Zhu, of Johns Hopkins University, conducted a study which found that scarcity polarizes preferences.
They found that when people perceive a bunch of items to be scarce, they will choose more of their favorite item and won’t really explore other choices. For example, at a dinner party, a person might serve himself more Chilean seabass of which there is a limited quantity and ignore other more common and more abundant fish and meat dishes, even if there are other selections they might also enjoy. On the other hand, in situations of abundance — in which there is a lot of every item – a person is more likely to spread out their choices and take a little of every item. Their findings certainly have implications for businesses trying to “nudge” people toward certain options. They conducted many similar studies which validated their findings.
This research has obvious implications for retailers. If a company has a popular, high-margin product which it wishes customers to buy more of, one course of action could be to make that the only product on display. However, since customers see stores with a limited selection in a bad light, a better option is to present just a few of each product the store offers, thereby increasing desire for the most-popular item.
Ultimately, the value that any product or service has is influenced not only by its actual worth but also by how available or scarce it is perceived to be, and whether it is presented alone, presented with some other items or many other items. While that is an inherent element in the economic laws of supply and demand, scarcity can be either real or imagined, and can have either a positive or negative effect. Keeping this in mind when introducing a new product or pricing products can mean the difference between selling well and selling out.
Quote of the Week
‘In order to be a great marketer, you have to be focused and look at scarcity, urgency, activity and passion in the marketplace.”
© 2017, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.