ARE you familiar with the saying in psychology that we want something we cannot have?
The economics theory of the law of supply and demand states that demand will fall if supply is abundant, whereas demand will rise if supply is limited.
People perceive immense value in something to which is beyond their reach. Thus, they are more swayed to respond if something is exclusive, prohibited, or limited.
This type of promotional tactic is extensively used in a number of ways: “members only,” “limited edition,” “introductory price,” “3-day sale,” “only 3 rooms left,” “limited seats only,” and “until supplies last.”
Experts have revealed that human beings hate the feeling of missing a good bargain. And while some merchants are aware that such customers are highly price-sensitive, they dissuade them from buying in a normal situation—items carry its regular price and there’s no time limit to purchase these.
Sometimes the pitch “limited supply” is legitimate; typically it’s not. Who knows?
Exclusivity or the scarcity of supply propels the sellers to dictate a premium price on their goods or services. (Onions, anyone?)
The best example of this is the tactic used by the late Bernie Madoff, the securities fraudster who was said to have operated the largest Ponzi scheme in the world.
To get access to this secret fund manager to manage your money and invest it, you will have to know someone who knows someone who knows him. Do you see how exclusive it is? And once you get the opportunity to speak to him, he will steer you to take your money with you initially and find someone else to manage your funds if you are not convinced of his investing prowess in the securities markets. He posed to his investors as if he was not interested in their money primarily. It took decades for regulators to unravel what his investment company was: a Ponzi scheme. This cunning and manipulative scheme made his victims crave more to be admitted into his investment company.
This cognitive bias is called psychological reactance. It refers to a person’s unpleasant motivational reaction when their concept of freedom is threatened or eliminated.
Our curiosity is a compelling force that drives us to act irrationally. The more mysterious it is, the higher the likelihood we want to participate in it.
When dealers create an illusion of scarcity, it boosts the demand for their goods or services as the buyers’ behavior is unconsciously stimulated by their fear of losing or what we call as the loss aversion bias.
In their book “Marketing” (7th edition, 2003), Roger Kerin, et al. defined ethics as the moral principles and values administering the actions and decisions of an individual or group.
For that reason, if business strategies, such as the scarcity principle, are employed to influence the buying decisions of the public unwittingly, would it be considered an unethical practice of doing business?
In Robert B. Cialdini’s book, “Influence: The Psychology of Persuasion,” he described the scarcity principle as those opportunities seem more valuable to us when their availability is limited.
Why do you think some manufacturers or sellers limit the number of productions of their goods in order to serve only a few of their customers? Don’t they want to sell more? The answer to that question lies in the cognitive biases discussed and the theory of the law of supply and demand.
The same principle applies to collectible items such as art pieces, vintage cars, old coins, etc. The perceived value of those items is formed in the collectors’ minds, their desire for ownership. The rarer it is, the better for them, and they are more than willing to pay a premium so as to have it.
In addition, the “deadline tactic” is also applied here in which the opportunity is offered on a time limit, which makes this tactic even more effective. Because time and stocks are limited, customers find themselves grabbing the chance thinking there will be no other time to act but now.
So, the next time you like to shop for a limited-edition item or join an exclusive club, before you part with your money, sincerely ask yourself this question: “Do I really need this, or am I slyly persuaded to buy or join in this?”
If your answer is the latter, it will be better for you to walk away from the establishment and save that hard-earned money for your big financial goals—like securing your and your family’s financial future.
Rosemarie Gases is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 100th RFP program this March 2023. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-6248110.
