09 Apr Scarcity: a High Luxury Principle hard to spot
Looking at the fleeting pace of 21st century business models, luxury represents a stark contrast. Timeless, enduring, always striving for penultimate quality, sophistication and differentiation at the cost of being polarizing. The principles that underpin the very notion of luxury have a lot to teach us – particularly in times of rapid acceleration.
Throughout the entire history of humankind every timeless creation is driven by the energy, inspiration and vision of the passionate craftsman. Behind every magnum opus lays a higher purpose. By its very definition, the outcome is hard to replicate, let alone scale. And scarcity equals exclusivity: A Bulgari Magsonic Sonnerie Tourbillon movement contains over 900 hand-finished parts – the time it takes putting a complicated timepiece together in this category can easily exceed two years. No wonder, this comes at a price steep enough to return very healthy profit margins, demand outstripping supply, driving value over time. At its most extreme, price increases will further increase demand.
How does scarcity work, what really drives it and what can companies outside the world of luxury take from this powerful dynamic?
Aston Martin One-77. Limited production run (77), hand crafted, full carbon-fibre body, 1.8m USD.
A Luxurious Strategy
Let us first briefly examine how scarcity works. Scarcity is paramount for luxury brands because at the root of the very notion of luxury, supply must never outgrow demand.
Whether in reality or in perception, demand is always highly disproportionate to supply. Maintaining this equilibrium is for the executive like the magic wand to the wizard.
To create scarcity is a choice, not an accident. And the toolbox is quite vast: vertical integration spanning the entire supply chain from sourcing materials to retail allows full control over supply and (deliberate) scarcity at the front end. Scarcity is celebrated in retail, too. Exclusive and selective distribution allows controlling this experience in its most finite granularity. Limiting time, availability of products, exclusive previews, waiting lists etc. are all mechanics to fuel the fire. Limiting materials and production runs are also part of the toolbox. A high price point is the most obvious, but if the former are all calibrated well, price is no longer the strongest driver of demand. Brand Communication is the arrow to the well-trained expert, fuelling the dream and creating desirability, deliberately communicating from the inner circle to the aspirational masses.
Scarcity is what drives desire, brand power – and with it the entire luxury proposition outside the band of rationality.
The Dream Equation, outlining drivers and mechanics of scarcity
Keeping this magic up is not a trivial undertaking however, and every experienced luxury executive will know what pain oversupply will mean for his or her brand. Unlike premium or mass, the appreciation of damage is taken to another level. Maintaining scarcity at all cost is key to survival in the long run. Too much stock is taken back (and often destroyed) rather than discounted through the margin eroding drug addiction called ‘promotion’.
Learning Scarcity from Luxury Brands: Tech gets it, Finance not (yet)
Whilst not the entire spectrum of the tools described to create scarcity is fully transferable, there are a few very successful companies taking directly advantage of some of these mechanics. Apple, for instance, is a very explanatory case, mastering the creation of demand before the product is even out. Millions the world over aspire to the next product and will happily set up tent in front of an Apple Store, impatiently waiting for the next iPhone to hit the shelves.
Tesla is another great example: vertical integration (i.e. owned stores vs. franchise, at huge capital expense) allows for absolute control within retail. Creating desire up-front (see recent Tesla 3 launch) and taking 256’000 pre-orders in just 36 hours leverages the dynamic of scarcity in a democratized, contemporary format.
Both of these examples have a few key ingredients in common: a visionary, driven and often polarizing singular leader, radiating genius and inspiration. An organization that is able to take the promise to the market, delivering excellency in execution (product & experience). And a flock of believers (customers) turning their cash over to be part of it.
On the other hand, Finance (including private banking) is not maximizing these techniques fully. Overstatements of retail banks via weapons of mass communication do not meet the services they deliver proportionately. A lion on TV turns out to be a weak cat in its physical branch. Just the right dose of advertising will cure, but being all over the place in media won’t create any sense of scarcity in the minds of consumers. Fintech and Robo-Advisors are democratizing a largely commoditized service at a super rapid pace. Most traditional players would do well to take a step back and re-think not only how they position themselves, but what and how they ‘distribute’. And how even taking a fraction of the sparkle in the luxury business model might allow them to shine stronger.
Scarcity: Why So Powerful?
Engrained in us from the very early stages of life, scarcity is a concept that transcends society, generations and cultures – albeit in different degrees of strength.
It is the candy, TV and now the Ipad to the four year old: the more difficult it is to get, the more desirable it becomes. Assuming you know it is there in the first place, of course.
But beware: Luxury also teaches us that scarcity alone has very little power. Scarcity needs an entire ecosystem driven by a culture of excellence to flourish. The psychological reason why the principle of scarcity has proven to be so powerful is based on the fact that the notion of worthlessness is in strong relationship with endlessness. If anything, in times of fast moving consumption and deliberate, ever shorter product life cycles, anything with a dimension of absolute integrity will increase in value.
What can you touch, change, transform or do differently that will demonstrate scarcity and as a function will make your product, your brand, your company or indeed yourself more desirable?
Resources & Input Overview
- Veblen goods & effect
- Dream Equation: adapted from the Luxury Strategy, Jean-Noel Kapferer, HEC Paris
- Higher Purpose: http://www.markuskramer.net/purpose/
- Luxury Customers: http://www.markuskramer.net/the-changing-nature-of-luxury-customers/
- Integrity: http://www.markuskramer.net/can-executive-leadership-learn-luxury/
Image credits: Hermitage Court Chamber Herald Cat; Done for the Hermitage Magazine; Idea by Andrei Shelyutto, © 2012; Artist: Eldar Zakirov