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Scarcity

The gap between insufficient resources and the theoretical needs of an individual or group of individuals

What is Scarcity?

Scarcity, also known as paucity, is an economics term used to refer to a gap between insufficient resources and the many theoretical needs that people expect to be met by the said resource. As a result, people are forced to decide how best to allocate a scarce resource in an efficient manner so that most of the needs and those additional wants can be met. Therefore, all resources with non-zero cost in the process of consumption can be considered scarce to a given extent. However, in practice, what really matters is what we call relative scarcity.

 

Scarcity - Desert Picture

 

Basics of Scarcity

Hypothetically speaking, if every resource on earth was abundant, there would be no need for economists. Decisions on resource allocation would not be necessary, and it means tradeoffs would be redundant. Unfortunately, the real world does not work in such a way. Each commodity comes with a price; essentially, each resource on earth shows a degree of scarcity.

For example, time and money are characteristically scarce resources. In the real world, it is common to find someone with little of one resource or even both. A person without a job may have a lot of time but still be unable to meet his basic personal needs. An executive of a prestigious company may have a lot of money and able to retire at any time, yet he can only afford to go for a ten-minute lunch or sleep for just five hours each night. People who have an abundance of both money and time are very few in the real world.

 

Scarcity

 

Scarcity in Business

Ideally, scarcity causes the value of commodities to appreciate. Why? Well, commodities that are in short supply tend to be strangely attractive. It is a common scenario in real life because people sometimes want that which they cannot get. For such a reason, marketers take advantage of the fact that people tend to perceive those things that are in short supply as valuable to boost sales. Here are a number of tactics that make scarcity really work for marketers:

 

#1 Purchase countdown

A timer within a sales context implies that the sales team is defining scarcity as the key parameter. So how does it increase sale? Once a customer understands how much time she needs to make a decision, she will act with a sense of urgency. Companies like eBay use such tactic, and it works really well because it drives that last-minute rush to make purchases before time runs out.

 

#2 Sale price countdown

Countdowns also work in the context of a limited time sales price. A sales price countdown is used to drive urgency and encourage consumers to make purchases before time runs out. It creates scarcity as well as a buy now mindset while tapping into what sociologists call loss aversion to encourage consumers to make the purchase immediately instead of later.

 

#3 Next day shipping

Next day shipping also leverages the power of scarcity by using countdowns. May online companies use the tactic to let consumers know that they have very little time before they lose the opportunity to have their purchases shipped out the following day. It increases urgency on the part of the consumer and encourages her to make purchases. Companies like Amazon take advantage of countdowns to urge consumers to make purchases or else they will not guarantee next day shipping once time runs out. It works because many consumers would want their purchases to arrive as soon as possible.

 

#4 Seasonal offers

Seasonal offers are used to create scarcity and encourage sales because seasons and holidays don’t last that long. Actually, it is the reason stores such as Starbucks offer pumpkin-flavored products during the fall.  For example, at Starbucks, pumpkin-flavored drinks go for $7.81, which is slightly higher than the usual price of $6.67. So, what brings this difference? In the mind of a consumer, purchasing a seasonal drink is associated with indulgence. The consumer did not just buy a drink; she also received an additional item as well that is on seasonal offer. Essentially, a consumer goes all in.

 

#5 Limited stock notice

Because scarcity causes items to seem very popular, particularly for online buyers, many online sellers tend to leverage limited stock notices. When a consumer sees a product that she loves is almost out of stock, she will act with urgency and purchase it immediately. Companies like Zappos use the tactic to drive sales and encourage buyers to make purchases.

 

Final Word

Scarcity may seem like an abstract idea, but it can be a huge driver in marketing. Scarcity is the reason why almost everyone views those things that are in short supply as valuable. In addition, while it can drive sales, it is not the solution to lagging sales. If marketers use it too much, it may lead to the opposite effect; marketers will scare away their consumers.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Consumer Surplus Formula
  • Economic Value Added
  • Monetary Policy
  • Supply and Demand

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!