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« Marketing = mass psychology | Main | Elephant Math »

The Scarcity Shortage

From four years ago:

What's worth more: a pile of gold or a pile of salt? Throughout history, many people have chosen the salt. Gold is pretty, but you can't live without salt, and when it was more scarce than gold, it became valuable enough to use as a currency itself. (The word "salary" is even related to the Latin for "salt.")

Today, of course, salt is close to worthless. Given the choice between a pile of salt and a pile of gold, you'd go for the gold every time, because there's less of it around.

Scarcity, it seems, has a lot to do with value.

...we're running out of a lot of important things--clean water, free time, breathable air, the ozone layer, and honest leadership, just to name a few. At the same time, we have to worry about something that is about to affect just about every business I can think of. We're running out of scarcity.

Scarcity, after all, is the cornerstone of our economy. The best way to make a profit is by trading in something that's scarce. This is why the music and movie industries are so terrified by the millions of people who download entertainment from the Internet every day. Downloading threatens to make supply virtually unlimited, and that could make their offerings about as valuable as those of some kids down my street who recently tried to run a stand selling freshly made mud.

It seems as though once a category becomes successful, the headlong rush to knock it off is stronger (and quicker) than it ever was before. Last week, a woman who came to a seminar in my office was desperately searching for a way to improve her mortgage-brokerage business. I ruined her day when I suggested that she shut her company down and try something else. Twenty years ago, most mortgages were written by the local bank. Those banks planted the seeds of their obsolescence when they eliminated judgment from the writing of mortgages. Once they could automate a mortgage application, so could everyone else. So mortgage brokers used their low overhead and quick wits as an advantage and stole the business. Today, there are an infinite number of brokers to choose from, all offering essentially the same service. The result is that there is no scarcity, and no profit.

It's not just about product knockoffs, of course. While there are almost half a million lawyers practicing in the United States today, there are (gasp!) more than 125,000 in school right now. No matter what you believe about lawyers creating ever more work for ever more lawyers, there's no question that with so many of them, they're hardly scarce.

The same thing is true for doctors, Web sites, T-shirt shops, sushi restaurants, thumbtack manufacturers, and brands of blank CD-ROM disks. There are 100 major brands of bottled water. Someone opened a fancy ice-cream parlor in Manhattan, and then there were six.

If it's remotely digital (like music), then it's easy to mimic. And if it's easy to mimic, someone wins if they can knock off the original--the sooner the better. When someone starts to sell exactly what you sell but for half the price, how long does your good-service, first-mover, nice-person advantage last?

Zara, the fast-growing European clothing store, can knock off a new fashion before the original designer even gets it to the upscale department stores. Suddenly, the original appears to be the copy.

So how do you deal with the shortage of scarcity?

Well, the worst strategy is whining--about copyright laws and fair trade and how hard you've worked to get to where you are. Whining is rarely a successful response to anything. Instead, start by acknowledging that most of the profit from your business is going to disappear soon. Unless you have a significant cost advantage (like Amazon's or Wal-Mart's), someone with nothing to lose is going to be able to offer a similar product for less money.

So what's scarce now? Respect. Honesty. Good judgment. Long-term relationships that lead to trust. None of these things guarantee loyalty in the face of cut-rate competition, though. So to that list I'll add this: an insanely low-cost structure based on outsourcing everything except your company's insight into what your customers really want to buy. If the work is boring, let someone else do it, faster and cheaper than you ever could. If your products are boring, kill them before your competition does.

Ultimately, what's scarce is that kind of courage--which is exactly what you can bring to the market.

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