Sweeten Scarcity with Ample Warning

A most fundamental law of economics is supply and demand. When a product or service desired by consumers is in short supply, you can get a higher price. But there’s sometimes a price you pay for charging higher prices.
     Suppose major flooding hits your area, resulting in a shortage of flashlight batteries on your shelves. If you raise prices on your remaining stock, you might make out like a bandit in the short run, but be thought of as a crook in the longer term. Customers who pay more for a scarce item may end up developing ill will toward the retailer.
     Researchers at Stanford University came up with a surprising twist to all this, plus a suggestion for retailers to dissolve the ill will: Some participants in a study were given a gift, while the rest were denied the gift. Each participant was then asked how much they’d be willing to pay for the gift if purchasing it at a store. The average price was about 45% higher among those denied the gift than among those having gotten it. No surprise so far. The sort of denial experienced with scarcity raised the perceived value.
     Next, those participants denied the gift earlier were given the gift. Now every participant had the gift, and each of them was asked if they’d like to trade the gift for another item, which the researchers had determined was of about equal value. Of those who got the gift at first, about 40% said they’d trade. Among those denied the gift at first, about 80% said they’d trade. Denial led to dislike.
     In a follow-up study, the researchers promised some participants they could get Guess sunglasses if supplies lasted. Later, they were told the stock had run out. Those denied the Guess sunglasses ended up rating Guess watches lower and Calvin Klein watches higher than the other study participants, who hadn’t expected to win Guess sunglasses. The dislike spread to other products carrying the same brand name.
     There were a few more twists in the Stanford findings. Putting it all together, the researchers suggest that retailers can financially profit from pricing scarce items higher, but for longer-term good will toward the store, the retailer should give ample notice to customers. Warn customers about any shortages. Tell them how long you expect the shortages to last. Suggest alternatives they could purchase until the shortages ease.

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