💡Scarcity: The bias that makes you act irrationally

✍️ We want what is hard to get, and we want it badly. Even if it’s irrational…

Let’s go back to March 2020, around the time the pandemic started. If you went on Amazon around January and looked for medical masks, an average 10-pack of 3M N95 masks was $18. However, a couple of weeks later, that same pack was costing $100. That was a price increase of 450%!

And when Amazon and other retailers ran out of stock, people on eBay started selling a 2-pack for $60, when normally they cost around $6. Again, a crazy price increase of 900%. The thing is, despite these crazy price increases, people were still buying them. Demand was through the roof, but the supply was just not there.

So, what happened here? Why were people (and maybe you too) willing to pay for an item with a price markup of 450% or 900%?

It was because of the heuristic* called scarcity.

_{*A heuristic is a mental shortcut that allows people to make quick decisions, but heuristics can also lead to errors in judgment. That’s why scarcity is often referred as a cognitive bias.}

🧠 Scarcity influences our decision-making process and we are not aware of it

“If something is scarce, then it must be valuable. I want it!” 

Maybe with not that exact words but we use this logic to make many decisions. We implement the scarcity heuristic as a shortcut in our decision-making process to save time and mental energy. We use cues that signal that something is scarce to decide if we should have that thing or not. And most of the time, we do it unconsciously. Either if it’s the last piece of cake in a bakery or if it’s a limited edition watch. Our brains react the same.

Research says that when a product’s availability is limited, its perceived value increases regardless of the benefit we would get from it. So if two products are practically the same, but one has limited availability, we would rather have the scarce one. Even if it means paying more.

Not so rational right? So why do we act like this?

A hypothesis is that this behavior has its roots in our evolutionary past. When our ancestors lived in a world of limited resources, scarcity often meant the difference between survival and extinction. As a result, our brains evolved to prioritize acquiring scarce items to ensure our survival.

Nowadays, the heuristic continues to play a role in our decision-making, influencing our purchasing behavior, deciding in which area to live, and even our social interactions with friends and romantic partners.

💡Scarcity is implemented by marketers everywhere

Stock or Capacity scarcity

Air France uses the scarcity heuristic to show that there are only 4 seats left at that fare. Customers will try to act quickly due to the fear of missing out on the low price and paying more after the few limited spots are taken away by other people.

Time-based scarcity

Amazon time availability scarcity. The specific discount of 21% will only be available for little time and prompts the customers to take action as soon as they can so they don’t miss out on the savings.

Limited Edition Scarcity

An extreme example happened when the watch brand Patek Philippe announced they would discontinue one of their most iconic watches, the Nautilus 5711. For the grand finale, they decided to release a 5711 in cooperation with Tiffany & Co. But to make it more special, they only produced 170 pieces. “Scarcity enters the room”

The retail price at the beginning of December 2021 was around $53K. A couple of weeks later, there was an auction in NY for one of these watches. The winning bid was for an outrageous $6.5 MILLION! Yes, the person who made the bid ended up paying a 12,164% markup because it was a limited edition watch, plus the last model of the 5711 that will ever be made. Was it worth it? Now the current price of that watch is around $1.8M. Still a lot, but with a nice $4.7M discount 🙂 .

✅ How to apply this to your business

Apart from the examples mentioned before:

• Limited stock: Inform your customers when you have a few items left.

• Limited time: Inform your customers that it’s only a limited-time deal.

• Limited edition: Inform your customers that this is a rare item based on its unique features.

which show how scarcity creates a sense of urgency and drives people to make a decision (quickly) because of the fear of missing out, here is another idea you could implement.

Limit the items a customer can buy while using a discount

This strategy combines two biases. Scarcity and anchoring. Researchers made an experiment in which soups were sold in a supermarket with a 10% discount. Some days there was no limit to the items people could purchase, but on other days, the supermarket limited the deal to 12 cans per customer.

In the “no limit” scenario, clients bought on average 3.3 cans. But when there was a limit in place, customers bought an average of 7 items! That’s a 112% sales increase without any extra costs.

This happens because customers believe the supermarket acts in self-interest. So if the supermarket is limiting the items per customer, this signals that the deal is valuable and that they should take advantage of it. Also, by limiting the deal to “12 cans”, the number is used as an anchor which leads to clients having a higher number of cans in mind. We will dive deeper into anchoring and its effects another time. This bias deserves a newsletter edition on its own 😃 .

📖 Further information or sources for you to dive deeper into it

Here are some resources and information for you to dive deeper into this topic.

• Scarcity Heuristic 

• Influence: The Psychology of Persuasion - Robert B. Cialdini, PH.D.

• Thinking Fast and Slow - Book by Daniel Kahneman

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Juan Diego

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