What is Scarcity?
Scarcity (also known as paucity) is a phenomenon that goes beyond economics and is deeply rooted in human psychology. We can talk about what scarcity in business is if we talk about the limited nature of resources and the unlimited wants and needs that people are ruled by. Of course, even if the roots aren’t economic, scarcity branches pretty well in this vast domain, and it generates a more or less simple economic conundrum: what does it take to fill the gap between limited, scarce resources and limitless human needs?
In this situation, business leaders are required to make good decisions about how to allocate resources or efficiently advertise products and services so that in the first phase, at least the customer’s basic needs are satisfied, and in the second phase, as many needs as possible are to be tackled. The theory says that any type of resource that costs more than zero (nothing) to produce, deliver, or consume, can be called scarce, at least to some degree. This is the relative scarcity – but for real businesses, examples of scarcity matter more in practice, with real-life scarcity examples.
So what is scarcity in a fully functioning society nowadays? Scarcity in business refers to the point when societies need to decide how to allocate scarce resources efficiently, so that the needs and wants of the majority of the population are met. What has the most effect on society is relative scarcity.
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Examples of scarcity related to businesses will usually be found among the following:
- Scarcity of exported products that result from a deficiency of production materials
- Refusal of production due to the products not generating sufficient profits
- A state of an emergency where production lines are affected
- A lack of human and/or technological resources that has underproduction as a consequence
What is the Scarcity Principle?
Explaining the Scarcity Principle will shed light on how the above situations can affect transactions for the customers. It’s a deeply rooted psychological principle which states that a limited supply of a product will increase the demand for that certain product.
Knowing that a scarce item generates more attractiveness is a delicate subject for any business and overusing this principle or using it falsely will most likely lead to the opposite desired outcome, it will decrease sales and even the business’ reputation, overall.
To be even more precise, “The scarcity principle is an economic theory in which a limited supply of a good, coupled with a high demand for that good, results in a mismatch between the desired supply and demand equilibrium.”
In marketing, scarcity is usually used to employ the sensation of product / service shortage, which encourages a possible customer to act (buy) faster. Some companies may employ the definition of scarcity through exclusivity techniques that encourage customers to speed up their decision process along the economical funnel. Using scarcity in marketing not only makes your products more desirable in the customer’s eyes, but also provides transparency regarding your current stocks.
The difference between a product’s supply and its demand always needs to be taken into account. A high supply of an undesired product is not scarce, thus, it’s sale worth is diminished. On the other hand, a low supply of a product that everyone wants will trigger the scarcity effect, making it more desirable. The action of selling such a product has a higher overall value.
Scarcity is one of Robert Cialdini’s 6 principles of persuasion and is closely tied to supply and demand. This principle will be further divided in two; two social psychology principles exist that work with scarcity and increase its effect, persuading potential customers to take the desired action, such as filling out a lead form or directly purchasing a product:
Social proof
The effectiveness of the scarcity principle is determined by social proof. If a certain product is currently sold out or it is stated that the inventory is very low, it can be indirectly understood that the product is certainly good, simply because everyone appears to be purchasing it.
Commitment and consistency
The other principle that contributes to the scarcity effect is commitment and consistency. If a business commits to delivering a product, then it’s unable to for a certain period, it will make the customer want the item even more because he currently cannot have access to it.
These examples of scarcity in action create a user pattern – but should never be abused, as it can harm your company. So how can scarcity work in your business’ favor?
How scarcity works
In his 1932 Essay on the Nature and Significance of Economic Science, Lionel Robbins, a British economist, defined economics directly in terms of scarcity: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
In other words, in a world in which there would be infinite resource availability, the economy as we know it would barely exist – if it would exist at all. No market failure would take place, as the need to make decisions about how to allocate resources and cope with structural scarcity simply wouldn’t exist, as there would be no incentive to effectuate trades, thus exploring and quantifying resources.
In our current economy, based on supply and demand, almost everything costs a certain amount, thus, exploring and quantifying resources is crucial, which has the direct consequence that each and every resource has the condition of scarcity attached to it to a certain degree.
Out of these, time and money are examples of scarcity that are common for both businesses and customers. They are intrinsically scarce and, most of the time, imbalanced – and it is in the balance between these two that scarcity can be used for the benefit of both your company and your customers. It’s all about context, as Nir Eyal states. Context matters just as much as the product you are selling. We will further explore some examples that can help you easily boost your conversion rates.
Scarcity examples that can boost conversions
Since the value assigned to products is influenced by their degree of scarcity, advertisers usually employ strategies that are meant to take advantage of the scarcity principles. It’s how marketing products labeled as “hot items” / “currently out of stock” are born.
Generally, two types of scarcity can be safely used to boost your sales or conversions and induct the opportunity cost. Both of them revolve around employing the lack of time or quantity as a purchase motivator:
- A quantity-related scarcity – Only X more products available at this great price!
- A time-related scarcity – The offer is available until X!
Each business’ applications of these examples of scarcity meaning will probably differ, but the principles are set in stone. What is important is to not over abuse these examples of scarcity – as in, not to create false examples. Some successful scarcity principle employments are already given as an example of proper use and have already been used by other businesses in turn:
Booking.com
Booking.com usually employs the following scarcity triggers:
- Booked X times in the last 24 hours – this makes certain locations/hotels more desirable.
- Only more X rooms available for booking – this implies that the time for booking is becoming scarce.
- Our X last available rooms – this entails scarcity when it comes to the call to action.
It doesn’t mean that the employed examples are fake, it just means that proper advantage has been taken of it: the information is accurate and even more important – persuasive.
Amazon.com
If you shop on Amazon.com, you will more often than not notice these scarcity triggers:
- Only X left in stock
- Up to 50% off until X
Both quantity-related scarcity and time-related scarcity are properly used by Amazon to generate the highest possible number of conversions within a given time.
Spotify.com
Spotify.com also employed a great scarcity strategy: when Spotify was first launched, the United Kingdom was the only country that had no invitation from a friend requirement entailed to create an account.
A higher than expected demand kicked in, thus Spotify started to require invitations to be able to properly manage the massive inflow of new users. To overcome this, and not force anyone outside the UK to have an invitation in order to create an account, Spotify Premium (a paid service, unlike basic Spotify, which is freemium) became available.
Anyone in the world could create a Spotify Premium account, free of the invitation requirement. This was a great use of the scarcity principle, as such, Spotify achieved very high levels of consumer demand in a very short time.
Avoidable scarcity applications
Scarcity is a delicate mechanism because it works with the balance of supply and demand. It works very well unless it’s fake – and in modern times, news of fake scarcity employment travels very fast and will almost instantly harm your business. If you misuse quantity-related scarcity or time-related scarcity (using both at the same time usually raises some questions in anyone’s mind), you may as well forget about the positive uses of scarcity examples.
Scarcity is a very powerful principle, but this power depends on execution honesty. Fake scarcity is to be avoided at all times. When you have a product in high demand and low supply, simply be transparent about it. Clearly communicating the realities of your business’ scarcities instead of manufacturing them is the proper way to achieve a higher conversion rate and to increase net revenue for your company.
Frequently asked questions about scarcity
How does scarcity influence consumer behavior?
Scarcity influences consumer behavior by creating a sense of urgency and perceived value. When consumers perceive a product or opportunity to be scarce, they tend to attach higher value to it and are more motivated to take action to acquire it. Scarcity can trigger a fear of missing out (FOMO) and drive consumers to make purchasing decisions more quickly.
How can businesses balance scarcity with customer satisfaction?
Businesses can balance scarcity with customer satisfaction by: Transparency: Be transparent about the availability of products or limited-time offers. Clearly communicate stock levels, duration of promotions, or the number of spots available to manage customer expectations. Value proposition: Ensure that the perceived value of a scarce item aligns with customer expectations. Scarcity alone may not be enough; customers should still perceive the product or opportunity as valuable and relevant to their needs. Customer communication: Provide clear and timely information about scarcity-related promotions, limited-time offers, and stock availability.
What is scarcity in business?
Scarcity in business refers to a limited availability of resources, products, or opportunities relative to the demand or desire for them. It is a fundamental economic principle that drives consumer behavior and affects pricing, marketing, and decision-making strategies.
