Computer Screen Chart Thrive Digital

If we look at one of the most basic ideas in economics, the idea of demand and supply. Most people are familiar with this idea, and even if you are not, you will be familiar with its effects. If demand for a product increases, then price goes up (and vice versa). Similarly, if supply for a product increases, price goes down (and vice versa). If you are selling a product that is exactly the same as everyone else’s (i.e. you are selling on cost) this means that competing internationally is not viable. This is because there are many substitutes, and therefore a high level of supply. This results in the market price being low and the industry competing away any Super-Normal profit. This is the basis for the “be different argument”. If you are the only company who is selling the product that you are selling, then supply is limited to what you produce. Your company owns the entire supply, and can dictate it accordingly.

We can take demand and supply one step further. It also says that you can either choose the price (and the market chooses the number you sell), or you can choose the number you sell (and the market chooses the price). Most companies choose the former. Those companies look at their product, look at the competitors, and come up with a price. The market then dictates how many they sell. If they do not sell enough, they have to bring down the price. This is why you get an end of season sale, because no one wants winter clothes in summer. Companies know demand will fall, and so must reduce price to sell the remaining stock. You cannot choose both price and quantity.

However, what if you set the price, and you limited the quantity to below what the market wanted? This is exactly what Koenigsegg does. In the case of the Koenigsegg One:1, only about 300 cars will ever be produced. There are more than 300 people (even at the $6m price tag) that want to buy a Koenigsegg One:1, but only 300 will ever be able to. This introduces scarcity into the market. Undersupply means that there is an incentive to buy. If you are told that there will only be 300 of something available, you are more likely to want one. This high demand creates a sense of urgency, for the people that get one of the 300 it makes it more exclusive, for those who don’t it makes them more interested in getting the next Koenigsegg model.

Think of something that you plan to purchase, but haven’t bought yet. It might be a new car, or a designer coat. Something that is a substantial purchase, but within your means, and that you are planning to buy in the next year or so. Now you may or may not end up buying this product, something better may come along, or you may find something that you want more and spend the money on that. There are a multitude of reasons that you may not buy this product. If I told you, however, that there were only 100 left, and they had sold 200 in the last 24 hours, you would be far more inclined to buy it now. You may even be willing to pay a little bit more to make sure you can secure it.

Further to scarcity increasing urgency, there is also a well-known principle called herding. Herding dictates that a person is more likely to want a product if someone else wants it. This is well documented phenomenon and you can see examples across multiple industries. However, it does require transparency (or at least perceived transparency). I.e. customers have to be able to see the product is selling, people have bought it, and there is a finite number of products.

These ideas of limiting supply and taking advantage of herding are frequently used in crowdfunding. Platforms like Kickstarter and Indiegogo build it into their sites. If you go onto one of these crowd funding sites, and click on one of the products at random, you will see that it clearly shows a number of indicators. There is a bar that shows you how close the product is to getting funding, how many of each rewards have been sold and how many remain. If they are closer to their aim you are more likely to buy, and if there are very few left you are more likely to buy now.

This approach is very effective. It is practiced by brands from Apple to Koenigsegg, but if your product is not differentiated, and you try and undersupply the market, it will encourage competitors. Competitors are bad: supply increases, price drops and you miss out on Super-Normal profit. In order to take advantage of these effects, your product must be differentiated.

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