The Scarcity Principle: How To Avoid Expensive Mistakes
“The way to love anything is to realize that it might be lost.”
-G. K. Chesterton
We want what we can’t have. It’s an old saying, and it’s usually very true for most people anyway, as you and I are far too intelligent to want what we don’t want, aren’t we?
We both understand that because something is less available to us (a product, an invitation, a lover) does not mean it is worth more. Of course, we aren’t willing to pay over the odds with our money, time or heart. That’s for the uneducated, uninformed, undesirables, but not us.
I’m currently reading Robert Cialdini’s book Influence. It’s the book Charlie Munger most gifted and the chapter that’s stopped me from reading to write this post concerns something called the scarcity principle.
The scarcity principle is interesting and effective exactly because we know that we’re being unreasonable. It’s the assessment of our unreasonableness (it’s only a limited edition watch, when’s the next party, I know that X is bad for my mental well-being but I don’t want X to be with anybody else) that it becomes more valuable to us.
The scarcity principle can be used against you in a raft of ways and it is at your peril that you do not understand how.
Here are 5 powerful examples of the scarcity principle at work (including how you can use it too).
The Marketing Fiasco of The Decade
Freedom: The Scarcity Principles Angry Cousin
Knowing This Alone Isn’t Enough To Save You
How Salespeople Use And Abuse This Principle
How You Can Use This To Your Advantage
Read time: 11 minutes
1. The Marketing Fiasco of The Decade
To first understand the power of the scarcity principle we’re heading back to 1985 when the behemoth household name Coca-Cola failed to understand basic psychology.
“I have a hunch the Coca-Cola Company wished it had known of these findings when, in 1985, it began a historic blunder that Time magazine called "the marketing fiasco of the decade." On April 23 of that year, the company decided to pull their traditional formula for Coke off the market and replace it with New Coke. It was the day the syrup hit the fan. In the words of one news report: "The Coca-Cola Company failed to foresee the sheer frustration and fury its action would create. From Bangor to Burbank, from Detroit to Dallas, tens of thousands of Coke lovers rose up as one to revile the taste of the New Coke and demand their old Coke back.
My favorite example of the combined outrage and yearning produced by the loss of the old Coke comes from the story of a retired Seattle investor named Gay Mullins, who became something of a national celebrity by establishing a society called the Old Cola Drinkers of America, a widespread group of people who worked tirelessly to get the traditional formula back on the market by using any civil, judicial, or legislative means available to them. For instance, Mr. Mullins threatened a class-action lawsuit against the Coca-Cola Company to make the old recipe public; he distributed anti-New Coke buttons and T-shirts by the thousands; he set up a hotline where angry citizens could vent their rage and register their feelings. And it did not matter to him that in two separate blind taste tests, he preferred the New Coke to the old. Isn't that interesting; the thing Mr. Mullins liked more was less valuable to him than the thing he was being denied.”
Hang on a minute…
“And it did not matter to him that in two separate blind taste tests, he preferred the New Coke to the old. Isn't that interesting; the thing Mr. Mullins liked more was less valuable to him than the thing he was being denied.”
How can any reasonable, rational and mentally well person want the thing he least liked, MORE?
Because of a little thing called, freedom.
2. Freedom: The Scarcity Principles Angry Cousin
"Freedoms once granted will not be relinquished without a fight."
It might sound odd for a retired man to fight and demand for a publicly traded company to just give away its multi-billion dollar cash cow by revealing its recipe but that’s exactly what happened. I laughed when I first read this and imagined people lining the streets with “We want our Coke back” t-shirts, caps and flags. To understand this rather nonsensical example it’s important to understand the real driver behind this; A loss of freedom.
"When something becomes less available, our freedom to have it is limited, and we experience an increased desire for it. We rarely recognize, however, that psychological reactance has caused us to want the item more; all we know is we want it. To make sense of our heightened desire for the item, we begin to assign it positive qualities."
Coca-Cola had become symbolic in America and the greater world. It was the perfect refreshment and brought with it identity, community and status.
Those F***ing Christmas adverts!
Taking away their old Coke, which had experienced WW1, The Great Depression, WW2 and more before the mid-80s was an attack on their identity, triumphs and losses. It was an attack on being American and everything America stood for.
Changing generational norms is inherently difficult.
The most ludicrous thing about this is that Mr Mullins preferred the new Coke in 2 separate blind tests. Undeterred, he wanted what he couldn’t have, for better or worse.
Change Coca-Cola with any genuine freedom that can or has been taken away and you can imagine the vortex of anger that this could create. This is why people line the streets in protests when freedoms (especially others) are taken away. This is why people fight and die for such freedoms.
Perhaps the Communists understand this better than most:
"The pattern offers a valuable lesson for governments: when it comes to freedoms, it is more dangerous to have given for a while than never to have given at all. The problem for a government that seeks to improve the political and economic status of a traditionally oppressed group is, in so doing, it establishes freedoms for the group where none existed before. Should these now established freedoms become less available, there will be an especially hot variety of hell to pay."
3. Knowing This Alone Isn’t Enough To Save You
“Opportunities seem more valuable to us when they are less available.”
Last week I fell for the scarcity principle, whilst reading the book. Can you imagine that? The funny thing is I don’t feel stupid. I feel justified to a certain extent. Let me explain.
I’ve always been interested in investing but in the last year, I’ve started investing my savings into various stocks. I follow some people I trust, do my own research and only invest in companies I understand and think are quality. Ulta Beauty, the American make-up retail giant has been on my radar for about 10 months. In those 10 months, the stock price has ranged from about the mid $500’s to a low of about $320.
I liked Ulta and thought about investing my money a few times, especially towards the lower end but never pressed BUY.
That was until last week.
A certain very respected, famous, legend of investing bought a (cough) small position in Ulta last week. That person is Mr Warren Buffet through his company Berkshire Hathaway.
As news of this spread faster than Covid 19 you can imagine what happened. When somebody who has a 20% annualised return for nearly 60 years buys something that thing they buy lights up in the eyes of everybody else. Everybody who invests, whether seriously or otherwise wants it.
The stock shot up over 15% as people panicked to buy it.
I, being rational, did not. I went back to read the report on Ulta that had first got me interested and read another one. I knew what I was going to do but I just needed to come to terms with it.
I didn’t want to buy Ulta because Mr Buffet had. In fact, I’m lying. I did. I did want to buy Ulta because Mr Buffet bought it but I didn’t want to see myself as irrational. I knew it was a quality company and it was at a discount so I waited for a day, and then another day, and then another day before I finally bought it.
So, how does the scarcity principle come into this?
When Mr Buffet announced that Berkshire Hathaway was being a small stake in Ulta and the price started going up, that’s exactly when Ulta became more desirable to me. It pained me to watch the price go up whilst I waited and rationalised with myself. The scarcity was the current price and that price was moving UP!
I’d done the research, it was on my list and the rule is when quality companies become available at a discount you buy them. Because I hadn’t followed this rule I allowed myself to be part of a feeding frenzy.
The thing (stock) became more valuable and scarce because the price was going up.
Investing is a game of psychology and human behaviour. I still think the company is undervalued but I’ll value the lesson I’ve learnt from the last week.
4. How Salespeople Use And Abuse This Principle
“This tendency to want something more as time is fading is harnessed commercially by the "deadline" tactic, in which some official time limit is placed on the customer's opportunity to get what the compliance professional is offering. As a result, people frequently find themselves acquiring what they don't much favor simply because the time to do so is dwindling. The adept merchandiser makes this tendency pay off by arranging and publicizing customer deadlines that generate interest where none may have existed before.”
Sound familiar?
We’ve all done this. We’re looking at buying an online course and click on it to view the product. We then get sucked into an ultra-compelling and original funnel where at various times you will get seemingly the deal of the century if you buy this course. But wait, the offer is valid, as the timer that’s plugged shamelessly all over the page tells us, for X amount of time, ONLY.
Ha, I’m not irrational, “try harder,” you say.
Down the hole you go into the rabbit warren all the while tick, tick, tick. Even when you know what’s happening here psychologically it’s very hard to stay rational. You do get excited and anxious. All sorts of justifications pop into your head and they all start with ‘why’ you need it or ‘how’ it could ‘help’ you and the ‘time’ and ‘money’ you would save.
The thing is when we want something we want it. It’s just that simple. Most of the time from wanting it to buying it is spent justifying it.
This tactic works well on Black Friday when TVs that were priced at £499 the week before are suddenly priced at £499 a week later (yes, I know it’s the same price as most often the sales, believe it or not, aren’t actually on ‘sale’).
People aren’t interested in the TV (or anything else) when they’re abundant but when you say ‘once they’re gone, they’re gone’ you create scarcity.
Why? Because of the scarcity principle.
People want what they can’t have.
So, having shown you how a giant corporation, you and I have been an idiot and fallen victim to this principle, I’m going to show you how you can use the scarcity principle to your advantage.
For those who have the nerve, anyway.
5. How You Can Use This To Your Advantage
“My brother understood the scarcity principle all too well. For a car he had purchased on the prior weekend, he would place an ad in the Sunday paper. Because he knew how to write a good ad, he usually received an array of calls from potential buyers on Sunday morning. Each prospect who was interested enough to want to see the car was given an appointment time-the same appointment time. So, if three people were scheduled, they were all scheduled for, say, 2:00 p.m. that afternoon. This device of simultaneous scheduling paved the way for later compliance by creating an atmosphere of competition for a limited resource.”
This can make for an uncomfortable experience between you and the buyers, but if you have the nerve you can create a firestorm.
You might well think that people would become annoyed at such low-brow shameless tactics but according to the above story they don’t. The person there first upon seeing another person turn up is at first mystified, then annoyed, then panicked. Then a third seller turns up and the whole thing turns into ‘I was here first’ or ‘I’ll offer more than they’re offering’.
You just sit there, collect your cash and try not to get beaten up.
Here’s another trick:
If you’re dating more than one person and aren’t exactly sure who like you more, invite them all out on a date at the same time. Cruel, but you’ll find out a lot about them one way or another.
Whether you’re selling something online, a car or want to make yourself more desirable the scarcity principle has and will continue to be a great accomplice.
Final Thoughts
I loved learning about the scarcity principle because we’ve all fallen victim to it at one time or another. The funny thing is at a basic level we all understand this, we just choose to ignore the giant, laughing pink elephant in the room.
If your job is to sell things you would do well to master this crafty principle. If you want to attract a lover, or want to remind one for that matter that you are not in abundant supply-that you are 1 of 1. Master this principle.
Some final advice…
“It is vital to remember that scarce things do not taste or feel or sound or ride or work any better because of their limited availability.”
- Robert B. Cialdini
Until next time, Karl (The School of Knowledge).
How You Can Help…
I tried to think of something cute and scarce to MAKE you share this post but I couldn’t do that to you 😅 Instead I just ask that if you enjoyed this article then please consider sharing it 😊
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It's well written with nice examples from Robert Cialdini. I do think manufactured scarcity is one of the bedstone of modern marketing. Behaviour science textbook explaine at length on how this works. Fascinating stuff. Thanks for sharing!
Great article. I’ve fallen for the online course clock countdown trick 2 times. Two times! And I haven’t finished either course. My credit card was mad at me.
I recently felt the FOMO when we were looking at property and someone else showed at the same time. The realtor booked us just like you said. We didn’t buy, but I felt it.