A few times per year, Adidas releases a new version of rapper Kanye West’s signature shoe, the Yeezy. Whenever this happens, sneaker fans everywhere lose their collective minds. Social media blows up, people wait in line for hours to secure a pair, and soon after the release, the shoes might command thousands of dollars on the secondary market (yes, there is a secondary market for brightly colored athletic slip-ons).
To the layperson, the Yeezys look like any old shoe. They don’t give you the ability to run faster or jump higher, nor do they unlock the secret of happiness.
So, what exactly is going on here? The answer is that Adidas does a brilliant job of leveraging an age-old sales tactic: scarcity marketing.
What Is Scarcity Marketing?
Scarcity marketing is a broad term that covers any instance in which a seller highlights the fact that an item is either rare, expiring, or in high demand. It’s a way to encourage a customer to make a purchase in a hurry, and usually at a premium price.
Scarcity marketing can involve capping how much of an item is produced, marking items down for a limited time, putting an expiry date on an offer, adding a timer to a checkout page on a website, and many other variations along those lines.
All of these tactics are based on manipulating the supply of – and, to some extent, even the demand for – a given item. All marketers know Economics 101: When supply is low and demand is high, prices go up.
Also, when something feels exclusive, hype builds, further driving up the perceived value. That’s part of the reason the latest iPhone or the hottest video game system always seems to have a production shortage just when people want them most.
To be clear, I’m not implying that these tactics are devious or underhanded. There are quality goods out there that can’t be mass-produced, and they should be priced accordingly. My aim is simply to make you aware of this specific and highly effective way that companies try to get you to part with your hard-earned money.
The Psychology of Scarcity Marketing
Scarcity marketing is effective in part because it plays on our innate sense of loss aversion. Most of us hate to lose something more than we like to win, a point famously proven by Nobel winning psychologists Amos Tversky and Daniel Kahneman.
I recently found out just how powerful loss aversion can be when my wife and I were searching for a home to rent on Airbnb.
After perusing the site for a while, we located a house we liked and started the process of checking out. Once we reached the final page of the checkout process, we paused, considering whether to put down a hefty deposit or keep searching for a better rental.
That’s when we noticed a pop-up message: “22 other people are currently viewing this property for these same dates.”
Before that pop-up, I could take the house or leave it. After I saw that message? I had to have it. I mean, this was a busy tourist season we were talking about. What if we didn’t get the place, and we ended up at a dingy motel on the outskirts of town?
If 22 other people were on the same page as me, one of them could book at any second! Then, I’d lose! The fact that so many others were interested in the property made me think it had to be a truly excellent house.
I entered my credit card information as fast as possible, happy to be “beating” those other folks.
I hope you can see the lunacy at play. One second, I didn’t even know there was competition. The next, I felt like I was in a race with 22 strangers to secure the vacation spot of my dreams.
While not everyone is hyper-competitive, I think the example elucidates just how effective a simple marketing tactic can be.
This same principle comes into play when buying just about anything online. Amazon will tell me that an old novel I’m interested in “only has two copies available!” When I book flights, Delta is constantly reminding me that the plane “only has three seats left!”
These little nudges create a subtle anxiety, pushing me to act just a bit more hastily then I might otherwise. As Harvard economist Sendhil Mullainathan says, “That’s [the] heart of the scarcity trap. You are so focused on the urgent that the important gets waylaid.”
Finally, perceived or real scarcity is a contributing factor in getting people to make ill-advised bets on financial bubbles.
Anyone with an interest in investing has witnessed the white-knuckle ride that bitcoin has been on lately. The once-obscure cryptocurrency rose in price by 1,800% last year.
A big factor in the rise was scarcity. Because only a finite amount of bitcoin can ever be made, some people treat it like digital gold. New money poured into bitcoin because people wanted to stake their claim on the scarce resource. The folks selling cryptocurrency-related services were more than happy to play up the scarcity aspect in order to whip people into a buying frenzy.
By all means, invest in bitCoin if you feel it has inherent value as the currency of the future. But investing just because you want a piece of something scarce makes little sense. My old Teenage Mutant Ninja Turtles sitting in my mom’s attic are scarce, but that does not make them valuable.
How to Stay Strong
In order to get better at making poised, rational, spending decisions, I highly recommend reading Trent’s post, “10 Questions to Ask Yourself Before Any Purchase.” In it, he lays out a strategy that is pretty much tailor-made to combat scarcity marketing.
The key is to carefully consider each and every purchase, as opposed to acting on impulse. Asking yourself questions such as “Have I looked for lower-cost alternatives?” and “Can I delay this purchase?” forces you to calm down and look at the situation in a more measured way.
If you run through a checklist of questions before making a purchase, you’ll be less likely to make a poor decision. Waiting 30 days can also be an effective way to sort fleeting urges from stuff you truly want.
Budgeting can also be very helpful. Just pick a budgeting style that works best for you and stick to it. If you’re diligent about buying only what you need or have saved up to afford, it’ll be easier to resist the siren call of the next great thing.
Summing Up
Scarcity marketing is real, and it’s powerful. But if we recognize its existence and do our best to make deliberate decisions when we encounter it, we can save some serious money.
The next time I feel pressured to buy an airline ticket because of seat availability, I will take the time to remind myself that there are 87,000 flights taking off in the U.S. every day. If I can’t find one that meets my specifications, I’m probably not trying hard enough.
Related Articles:
- 10 Useful Strategies for Learning Financial Self Control
- Money Can Buy Happiness – Just Not in the Way You Think
- Why Does Spending Cheer You Up? How to Break That Connection
The post Understanding This Marketing Trick Can Help You Avoid Impulse Buys appeared first on The Simple Dollar.
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