 |
| Source: Teen Vogue |
Why do we exhibit a strong desire to buy something that is not readily available? Many people would say that we all fall victim to FOMO at times (Fear of Missing Out). Psychologists have posited that "reactance theory" helps explain our behavior. In short, this theory argues that we become very uncomfortable, and perhaps even anxious, when our freedom is constricted. As a result of that discomfort, people have an even stronger desire to purchase a product. Of course, consumers also care about status. Thus, they value products more if many others cannot purchase it. Having a product that others can't get their hands on turns out to be very enticing. Thus, luxury goods manufacturers tend to use limited time offerings, special exclusive collections, and other related strategies to entice consumers. They intentionally create scarcity so as to stimulate demand and enhance willingness to pay on the part of potential customers.
No company has mastered scarcity better than Hermès. The company markets the famous Birkin bag, named after British actress Jane Birkin, who inspired Hermès Executive Chairman Jean-Louis Dumas to create the leather bag during a conversation aboard a flight in 1984. A classic Birkin 25 bag sells for more than $12,000 today. Could the company raise prices even further? Given the even higher prices on the resale market, it seems the firm could raise prices. However, as Carol Ryan wrote this week in the Wall Street Journal, Hermès chooses to drive profitability through a different strategy. She writes:
The brand limits how many it produces, so demand far outstrips supply. Hermès could easily jack up the price but has found a smarter way to profit from the Birkin’s popularity that is less likely to alienate loyal clients. To get a Birkin, shoppers must build a relationship with one of the brand’s sales assistants and wait to be offered a purse. This creates a perception that the biggest spenders get access to Birkins and encourages customers to splurge on other goods to build the equivalent of an “Uber rating” at the Hermès store.
If you would like to learn more about the incredibly successful luxury goods firm Hermès, I highly recommend the episode of the Acquired podcast that tells the company's long and storied history and breaks down its competitive strategy.
Scarcity does not only apply in the luxury goods market though. Special limited offerings prove to be an essential part of the "treasure hunt" experience at value-based retailers such as Zara, Costco and Trader Joe's as well. For these firms, the business model calls for drawing customers in to find those special offerings, but then hoping to sell them many other items while they are in the store. At a company such as Zara, customers visit more often than the usual apparel retailer, because they know that products won't stay in the stores for a long time. At Trader Joe's, special seasonal offerings will come and go, causing people to act quickly to grab popular items.
