If You Do Not Read This Article, You Will Simply Hate How Much Money You Will Lose.

The Christmas season is here and it seems that everyone is having a once in a lifetime sale. Deals are everywhere. But listen closely to the advertisements and you will notice a funny trend. They all say: “buy now,” “limited time offer,” or “quantities are limited.” These companies are not out of merchandise. Instead, they are setting psychological traps intended to play on your fears of scarcity.

What is Scarcity?

Definition of Scarcity from Investopedia.com

Scarcity means that you cannot have everything you want.

Corporations understand that you desperately want certain items. Parents want to get particular toys for their children. Dad wants the largest TV possible. Mom wants some alone time (and for those of you who cannot get it, you truly know the meaning of scarcity).

Corporations Use Scarcity to Inflate Profits

Do you remember when cabbage patch dolls were all the rage?

It was the 1980s and I was in junior high school. I recall how difficult it was for Aunt Gail to get one for my cousin Amy. The lines at the toy store stretched around the block. People paid unbelievable prices, and they were thrilled if they could get one even at that price. Black markets formed where Cabbage Patch dolls were scalped.

I was only in junior high, but  I remember thinking that the company must have lousy executives to plan so poorly before the Christmas rush. With a little forethought, I thought, they could have produced plenty for everyone to buy.

Ah, but I was young and na·ïve. I did not understand that they were intentionally manufacturing scarcity in order to inflate profits.

I saw the same phenomenon repeat itself in 1996 with Tickle-me Elmo. The $29  toy was resold for as much as $1,500 because they were so scarce. Parents did not want to refuse their children the one toy that they most wanted.

Do not think you are immune. Apple uses this strategy when they roll out each iteration of the iPhone.

Scarcity Inflates Value.

This can be done in many ways: Producing fewer items produces scarcity Limited time offers create scarcity. As the clock counts down to Christmas morning–scarcity.

Get your MBA at Charleston Southern UniversityCorporations know how scarcity works and they use this understanding to manipulate you. They intentionally say things like “But you had better hurry. These deals won’t last long.” Then they have the After-Christmas sale, End of Year Clearance, and New Year’s Sale where they repeat the same line.

How To Protect Yourself From the Scarcity Mentality.

Understand what is happening.

1. Companies sometimes intentionally limit distribution in order to induce scarcity. Remember the Black Friday sales? Limited quantities drove consumers to camp outside in the cold for hours in order to purchase an artificially scarce item. Did the company have more in the warehouse? Of course they did.

2. Sales with limited time-frames also create scarcity. Companies want you to think that if you do not buy now, you will never have the opportunity again, at least not at this price.

3. Specific items that do not have substitutes are scarce. For example, when I was a kid, I wanted Star Wars action figures. These were more expensive than any alternatives on the market. To my dismay, I got Star Trek Action Figures. To my mom, it was all the same, but on the play ground Mr. Scott and Dr. McCoy were not welcomed on the Millennium Falcon.

Now, here is where parents get into trouble.  Remember the large TV dad wants? There are many brands and most have similar ranges of quality or substitutability. Dad will likely be as satisfied with a Panasonic, Sharp, LG, or Sony as long as the screen is 60 inches.

However, if your little darling desperately wants a Doc McStuffins Time for your Checkup Doll, there really are no clear substitutes. A knockoff simply is not the same, and Disney knows it. They have been selling Doc McStuffins through “commercial-free” Disney Channel cartoons all year. This is non-substituability.

What To Do

1. Recognize that if you are chasing a popular but limited item, the laws of supply and demand are working against you.

2.Do not be duped by limited time offers (e.g. Black Friday or Cyber Monday are the only times you will see great deals). Deals will ebb and flow.

3. If you simply must have the  Doc McStuffins Time for your Checkup Doll, you will pay dearly to have it. But you can lower your bill  for adult items by overcoming scarcity with substitution (e.g. a different 60 inch TV than the particular brand you want) or time (e.g. the After Christmas Sale).

4. Budget. The best plan is to know how much you plan to spend ahead of time. Do not exceed this total.

A good deal, such as 20% off, becomes a bad deal when you pay 120% because of the credit card payments.

5. Don’t believe the lie that your love can be measured by how much you spend.

6. Remember that scarcity is a mindset. Corporations attempt to inject it into the equation. You will pay less when you reject a scarcity mindset.

I am not a financial Planner, but I highly recommend Dave Ramsey’s Financial Peace University, which I have used  in  my classes.

The Professor’s Recommended Reading

Financial Peace University

November 26, 2012

_______________

Dr. Gerdes is the Director of the MBA Program at Charleston Southern University

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2 Comments

Filed under Books, Economics, Leadership, Profitability

2 responses to “If You Do Not Read This Article, You Will Simply Hate How Much Money You Will Lose.

  1. Way cool! Some very valid points! I appreciate you penning this article and the rest of the site is also very good.

  2. Great article! You are correct, I am not immune.

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