Value, Scarcity, and Pricing in the Age of Superabundance

Jul 14

For most people, throughout most of human existence, scarcity was paramount.** Now we live in an age of not just abundance, but superabundance. The agricultural revolution created abundance– not by today’s standards– in food. The industrial revolution created abundance in manufactured goods. The information revolution not only created an abundance of communication and information, it also dramatically increased our ability to move production to cheaper locations and manage the complex supply chains that resulted.

Buyers–both individuals and businesses- benefited from a huge increase in supply, selection, and a huge decrease in price. We also ended up with a superabundance of credit, which helped fuel appetites for the endless array of cheap goods.

For sellers, however, the situation was often disastrous. Many local businesses succumbed to larger competitors with lower unit costs and lower prices. Even large, successful businesses found themselves on a treadmill, running faster and faster but never getting a sustainable competitive advantage. You might have just moved manufacturing to China, only to find a competitor had achieved lower costs in Vietnam. This is before we even get to the internet, where prices are literally going to zero in many cases.

So what can we do about this?

We need to rediscover scarcity. In many cases, we’ll have to create it. This is not as simple as producing “limited editions.” This won’t work for everybody. (If anyone has any information on how Nomenus Quarterly is doing, please let me know. The trendy magazine made the New York Times after cutting production from 50 to 10 and raising prices from $2500 to to $6500 per issue.) Rental car companies have had success raising prices after trimming their fleets. It may be easy to make a car cheaply, but having one available at the airport when you need it is a different story.

And that is the key to rediscovering scarcity. You have to understand what the customer needs that’s hard to deliver. At one point, just making something was enough. Now, whatever you can make, chances are someone else can make and offer more cheaply. In pricing, after all, you’re only as smart as your dumbest competitor, and chances are some new MBA is looking to make a name for himself by getting 25% of your market, even though it’s a dumb move for everyone. (We’ll talk about the latest round of Google v Microsoft in another post.)

In an age when a device as mind-boggling complex as a supercomputer’s worth of processing power is a commodity, the silicon itself has little value. But the ability to turn it into a data center takes some skill. The ability to do it tomorrow, in a certain location, with training, monitoring, and reliability guarantees is actually really valuable.

Whatever it is you’re selling, think about how your customers use it, and how there are situations when the overall experience creates scarcity bottlenecks. This could be the fact that while Southwest flies 10 cheaper flights a day, if you actually want a seat at the last minute, you’ll be forking over $1000 to Delta. Or if your customers require extremely high reliability or precision. Or if your customers order commodities from you, but require logistical and service support to deliver them to the right people, at the right time, and perhaps even set them up. Note that this does not mean you can charge all potential customers high prices all the time. It means that certain segments place a value on your offering, at least some of the time. Understand this, deliver what they need, and price appropriately.

A lot of this comes back to the one thing that is getting less and less abundant as everything else becomes superabundant: time. If you can save your customers time, you can make money. If you can save them more time than alternative solutions, you can make a lot of money. If you’re stuck on how to create scarcity, start with the customer’s time, which is already scarce.

** This goes all the way to our genes. Before Quik-E-Marts, our craving for sugar and fat helped keep us alive. Now it gives us heart disease. For more on this somewhat-related topic, check out the New Yorker article XXXL: Why are we so fat?

In addition to the genetic arguments, the article notes that the price of food, especially calorie-rich, nutrient poor sodas and other processed food, has fallen sharply. (This is partly due to increased efficiencies in farming and industrial food processing, and also partly due to subsidies that encourage production of food that we probably shouldn’t be eating. The cheapest, simplest, least-likely-to-happen step we could take to improve our healthcare situation would be to end subsidies for corn.)

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