Rafi Mohammed

Reap Higher Profits by Inciting a Buying Frenzy

Posted on November 22nd, 2010 (0 Comments)

With the economy on the upswing, demand is strong for luxury products. Pent up “frugal fatigue” has resulted in Louis Vuitton stores in Paris closing an hour earlier every day to “preserve stocks” for the holiday season. Similarly, some Asian customers are waiting for more than three years for the opportunity to purchase popular Hermes handbags. The multi-million dollar question is: why aren’t Louis Vuitton and Hermes simply increasing prices to equate demand with supply?

While we have been indoctrinated to obey the laws of demand and supply, there are market conditions when inciting buying frenzies by using low prices to create excess demand for popular products can result in higher profits. Key benefits of buying frenzies include:

  • Create Media Attention. There’s tremendous public relations value derived from media reports of determined customers standing in long lines and manically rushing to purchase an “in-demand” product. This results in higher demand.  
  • Increase Product Value. The “scarcity factor” often increases a product’s value to some customers. Many people value owning a product that others are craving, but are unable to purchase due to limited supply. This leads to higher demand.
  • Lock in Customers Today. Limiting supply incentivizes customers to purchase now. Disney’s “vault strategy” involves releasing classic animated movies such as Snow White for a limited time. Once the time period is over, Disney figuratively locks the film in its vault and pledges not sell it again for 10 years. The impending scarcity is a good motivator for customers, who think they may want the dvd in the future, to purchase today.
  • Save Costs. It may be profitable to save on costs by inciting a buying frenzy to sell a limited amount of stock in a short period as opposed to always having stock available. From a cost perspective, it may be more profitable for a popular bakery to be open only on the weekends (and generate long lines of eager customers) instead of accommodating demand by being open 7 days a week.
  • Maintain Brand. Many times companies resist raising prices because doing so is inconsistent with their brand. Many of us value Costco’s pledge not to mark-up prices by more than 14%, for instance. Similarly, some country music artists tour annually based on a reputation of delivering solid value (long concert filled with hits at a reasonable price). If price is part of an entity’s brand and integral to repeat business, it may be wise to keep prices low in spite of high demand.    

So what do you think? Are Hermes and Louis Vuitton undertaking the right pricing strategy? Does the upside of rationing their products outweigh the foregone higher margins that the market is dictating?

Add Comment
Send to Friend
Email Signup
RSS Feed