Scarcity is a concept that sits at the intersection of economics and psychology. Scarcity impacts a business’s supply-side policies and demand-side strategies, and it affects supply chains and operations, necessitating careful management in order to protect business models. At the same time, scarcity is a phenomenon to be harnessed by companies in their marketing strategies. Understanding the basics and variations of scarcity can help business leaders understand how to translate this concept into action.
What Is Scarcity?
Scarcity is what causes the underlying tension between supply and demand. In a “perfect world,” supply and demand would be at equilibrium. However, that is rarely the reality. An overabundance of a resource causes consumers to be complacent and undervalue it, while a shortage creates a sense of urgency that increases value and prices.
Scarcity is specifically defined as the gap between limited resources and unlimited wants. It’s the underpinning of economic theory and the related principles of opportunity cost, resource allocation, price elasticity and risk. Prices and perceived value rise when resources are scarce and fall when they are available in abundance. A business that suddenly finds its raw materials becoming more scarce is likely to suffer increased costs and potentially reduced profits. In the extreme, a real dearth can cause operations to cease completely.
Beyond economics, scarcity has been proven to have a significant impact on human behavior. Consumers see items in short supply as more valuable. They adjust their purchasing decisions to avoid missing out. Savvy marketers use approaches that take advantage of this human behavior to spur sales and raise prices.
- Scarcity is the result of an imbalance in supply and demand for a good or service.
- Scarcity is caused by excess demand, insufficient supply or lack of access; it can also be the result of natural resource limitations or purposeful business strategy.
- Scarcity can significantly impact economics — and human behavior.
- Businesses deal with scarcity when managing their supply chains and marketing strategies.
- Scarcity requires business leaders to pay careful attention to data and trends in order to manage its implications on revenue, costs, operations and profits.
Scarcity ExplainedScarcity can impact a business’s supply chain, causing fluctuations in the cost and availability of raw materials. It is a primary issue for supply chain and procurement managers who are tasked to keep supplies flowing at acceptable cost. Consider how vulnerable a commercial bakery’s cost structure is to a supply-side scarcity such as wheat shortages caused by drought, or to skyrocketing costs of cleaning supplies caused by excess demand during the global pandemic. Reduced availability of either product can cause the bakery’s costs to rise, squeezing profits. Further, scarcity can limit production of finished inventory, in turn reducing revenue potential. And in the case of scarce natural resources, a focus on sustainable sourcing today can help avoid issues of scarcity in the future.
Scarcity also plays an important role in product positioning and pricing. Businesses can use scarcity to help drive the sale of their products. By carefully orchestrating supply, a business can buoy the image of their products, raise selling prices and simultaneously optimize inventory carrying costs. This means that by creating a scenario where the supply of a product is less than the demand, the price of the product can be increased. It’s a delicate dance, since reduced supply also means lower volume of products sold. Many luxury brands are positioned in this way.
What Is the Scarcity Principle?
The scarcity principle is one of several principles of persuasion, discussed by Robert Cialdini in his book Influence: The Psychology of Persuasion. In a nutshell, the principle suggests that it is typical, repeatable human behavior to want more of what we can’t have. The same item becomes more valuable to us if we believe that we can’t have as much of it as we want or that it will become unavailable. The fear of missing out drives consumers to change their buying habits, tending to accelerate their purchases and/or pay a higher price. Classic examples of how the scarcity principle is used in marketing include “limited time offer,” “x items left in stock” and “X customers are viewing this item right now.”
Scarcity in Business
Because most businesses are both buyers and sellers of products, they deal with scarcity in managing their supply chains and their marketing. When making purchase decisions, businesses strive to source products efficiently, effectively and with an eye on availability. As sellers, business marketers consider scarcity not only when strategically positioning a brand or product, but also at the tactical level as well.
Scarcity is a primary challenge for supply chain managers, who are tasked with maintaining a steady, reliable and cost-controlled flow of supplies and raw materials. Predicting purchasing needs within the context of external demand can help a business stay ahead of scarcity issues. However, given the geopolitical turbulence affecting interconnected global markets, not to mention continuously evolving government regulation, this is not an easy task. Scarcity can cause volatile pricing that leads to unpredictable gross profit, or it can require alternative sourcing in order to avoid insufficient supply. Scarcity requires businesses to be more innovative and creative when managing inputs.
In marketing and selling, the perception of scarcity can help position a product as rare or uncommon. Human nature assigns more value to items with such attributes, as compared with commodities that are abundant. High-end pricing, limited quantities and greater demand are a circular marketing trifecta that is powered, in part, by the psychology of scarcity.
Several marketing tactics leverage the effects of scarcity, which boil down to the idea of missing out and cause consumers to complete a purchase they may otherwise have spent more time thinking about. Using time pressure, such as countdown clocks or limited-time promotions, is one approach. Displaying real or perceived stockout is another approach, such as warnings about dwindling available quantities or how many other customers are viewing the same item. This tactic also plays into the scarcity principle by creating a sense that the item is valuable and a good purchase because it is popular.
Why Is Scarcity Important?
A fundamental aspect of scarcity is that demand exceeds supply, making it an important consideration for many businesses. Scarcity can have an impact on prices and availability of critical inputs for a business, challenging business leaders to allocate their resources wisely to mitigate that supply-side risk. As such, it’s a good idea to be prepared for potential changes in scarcity. Supply chain planning involves predicting future demand and can be helpful in identifying potential scarcity issues as well as alternative sources. Scenario planning can help a business create action plans in the event of increased scarcity. Beyond supply chain planning for raw materials, scarcity can apply to other critical resources, such as employee talent, time and knowledge.
Causes of Scarcity
There are several types of scarcity, characterized by what causes the supply and demand to be unequal.
This type of scarcity is caused by demand that exceeds supply. It’s driven by the consumer. This means buyers have changed their level of desire for a product, while the volume of available product has remained the same. Changes in demand can be caused by any combination of expansion of the customer base, growth in customer income or changes in customer preferences. For example, the current growing demand for electric vehicles is expected by some to create demand-induced scarcity for some electric vehicle battery components.
In supply-induced scarcity, the level of supply goes down while demand remains constant. Suppliers drive this type of scarcity. For example, a high-end doll manufacturer may choose to retire a product, effectively depleting its future supply, but because there is constant demand, the doll is considered scarce and more valuable. Sometimes the “supplier” is the environment; for example, droughts and fires reduce the supply of crops or timber. A famous example is the 2011 earthquakes and tsunami that dramatically reduced Japan’s semiconductor manufacturing capacity. Regardless of whether the change in supply is natural or man-made, supply induced scarcity can be temporary or long-standing.
This is when supply and demand are misaligned for some buyers but not for all. These situations usually stem from unequal access for physical or financial reasons. Physical access challenges might be caused by lack of proximity to the supply or gaps in distribution — for example, the scarcity of authentic New York bagels in areas that are distant from the U.S. east coast. Another version of structural scarcity is unequal access to a product due to lack of financial resources, such as the inability of certain poor populations to access clean drinking water.
Types of Scarcity
Scarcity is a concept that can be viewed in two different ways: relative scarcity and absolute scarcity. Relative scarcity refers to the comparison of the availability of resources between two or more entities, while absolute scarcity looks at the amount of resources available as compared to an individual business's needs. Both types of scarcity have important implications for businesses, which must consider both when making decisions about resource allocation and pricing. By understanding the difference between relative and absolute scarcity, businesses can better plan for their future success.
Relative Scarcity vs. Absolute Scarcity
Another dimension to scarcity relates to a resource’s innate supply. Absolute scarcity and relative scarcity both describe scenarios with limited supply of resources, though only relative scarcity takes demand into account.
Absolute scarcity describes resources that are fixed in supply and cannot be increased or decreased, regardless of demand. Their supply is hard-capped due to intrinsic limitations. There is no ability to generate more of an absolutely scarce resource, and there are no true substitutes. Examples include:
- Time, because once it’s past, it’s gone.
- Fine art, as in there can only be one Mona Lisa.
- Land, because we’re not making any more of it.
- Bitcoin, which has been described as a currency with absolute scarcity since it is intrinsically capped by its own mining protocol.
In contrast, a resource with relative scarcity is one that has a limited supply but only in relation to demand. Most discussions of scarcity in a business setting are examples of relative scarcity. The key difference between absolute scarcity and relative scarcity is the relationship between supply and demand. Resources that are relatively scarce may exist in large quantities, but the supply just can’t keep up with demand. Relative scarcity requires consumers to make choices, evaluate substitutes and allocate resources. The three causes of scarcity — excess demand, insufficient supply and structural access — describe situations of relative scarcity.
Comparing Absolute and Relative Scarcity
|Absolute Scarcity||Relative Scarcity|
|Caused by excess demand||No||Yes|
Video games on the day of release
Sanitizer during flu season
Gasoline before a storm
Examples of Scarcity in Business
Businesses often use scarcity to their advantage when marketing their products. We see many examples in daily life, though the most effective are done subtly. Here are a few examples of how businesses use scarcity to drive sales:
- Travel companies highlight how many times rooms at a particular hotel have been booked that day.
- Airlines warn about the limited number of available seats left on a flight.
- Online retailers display colors or sizes that have been sold out beyond the colors or sizes being selected.
- Businesses add “while supplies last” to the fine print in a print ad.
- Coffee shops create seasonal, limited-time premium offerings.
- Art dealers use a numbered series on commercial art.
- Websites of all kinds include countdown timers to spur action before time runs out.
- Businesses list items as “back in stock,” cleverly letting consumers know that they missed something that others previously found popular.
Prep For Economic Change With NetSuite ERP
Because scarcity poses challenges and opportunities that touch nearly all aspects of most businesses, both on the supply side and the sales side, dealing with it calls for a comprehensive enterprise resource planning (ERP) system. Identifying potential supply chain challenges before they occur can help keep operations flowing and sustain profitability. On the sales side, careful execution of marketing tactics that leverage scarcity is a proven way to spur sales. In both cases, the ability to harness the power of scarcity relies on having access to the right, most up-to-date data.
NetSuite ERP, with its core accounting and finance functionality surrounded by a dozen operational modules, enhances a business’s ability to manage scarcity issues. NetSuite supply chain management helps a company stay on top of the flow of goods coming from suppliers to manage availability and costs. Plus, integrated ERP modules such as demand planning and inventory management help businesses predict future demand and optimize inventory levels. On the sales side, modules for ecommerce and financial management provide the ability to position scarcity relative to product promotions and to drill down on costs, profitability and production at the product level, which can help identify which offerings to promote and for how long.
Scarcity is the result of an imbalance in supply and demand for a good or service. The imbalance can be caused by excess demand, insufficient supply or lack of access. Sometimes scarcity is the result of natural resource limitations and other times it is manufactured by the business. Regardless of its origins, resource scarcity can cause price volatility and higher costs for businesses. Managing supply chains with this in mind is critical to keeping operations flowing and sustaining business models. At the same time, businesses can use scarcity to their benefit when developing and marketing their products. In all cases, scarcity requires careful attention to data and trends so that business leaders can manage the implications of scarcity on revenue, costs, operations and profits.
What is scarcity in economics?
Scarcity is the gap between limited resources and greater demand. It’s the underpinning of economic theory and several related principles, including opportunity cost, resource allocation, price elasticity and risk. Prices and perceived value rise when resources are scarce and fall when they are abundant.
Why is scarcity a fundamental aspect of economics?
Supply and demand are fundamental to economic theory, and scarcity is the concept that demand for a resource exceeds its supply. This can have an impact on prices and availability of critical inputs for a business. Due to scarcity, both consumers and businesses are constantly challenged to allocate their resources wisely and manage risk.
What are some of the most important issues regarding scarcity?
Scarcity can have an impact on a business’s supply chain, causing fluctuations in the cost and availability of raw materials. Further, scarcity can limit production of finished inventory, which reduces revenue potential. Scarcity can also play a role in marketing, for example, as a consideration in product positioning and pricing. When managed carefully, the concept of scarcity can help a business drive the sale of its products.
What are the effects of scarcity?
Scarcity has been proven to have a significant impact on human behavior. Consumers see items in short supply as more valuable, so they adjust their purchasing patterns to avoid missing out. Savvy marketers use approaches that take advantage of this human behavior in order to spur sales and/or raise prices.
How does scarcity affect decision-making?
The scarcity principle is one of several principles of persuasion, discussed by Robert Cialdini in his book Influence: The Psychology of Persuasion. In a nutshell, the principle suggests that it is typical, repeatable human behavior to want more of what we can’t have. The same item becomes more valuable to us if we believe that we can’t have as much of it as we want or that it will soon become unavailable. The fear of missing out drives consumers to change their buying habits, often by accelerating their purchase and/or paying a higher price.