17 September 2009

Pinto's Point

Sell scarcities, not abundance

By Jim Pinto

Even in the current global downturn, most of us are better off than our parents and grandparents. People are living longer, healthier lives and have more choices than ever before.

Food is cheap and abundant; yet some people pay $10 for “special” organic lettuce. MIT offers all its courses for free online; yet students attend classes paying annual fees over $36,000 (plus dorm expenses and books).

These paradoxes make sense when we consider how markets work, and redefine what is bought and sold. Amidst the abundance of choices, we buy “scarcities,” the things we really want.

Technology guru George Gilder has long postulated: “Every economic era is based on key abundances and scarcities.” Every new abundance brings matching scarcities, and many of our problems are centered on these recurring anomalies. Our current “scarcities” offer opportunities.

Markets create abundance by identifying needs, determining prices, and allocating goods. Markets thrive on scarcity, and turn it into abundance. Wealth is generated when something is scarce and can be offered at a high premium over cost.

Markets have given the world an unprecedented amount of information to help make choices. Google is free, yet the company is profitable, growing, and making more money each quarter. They have found ways to sell scarcities midst the free choices.

In the midst of a seemingly abundant choice of cell phones, Apple broke into the market to gain a leadership position fairly quickly. They did not offer what was already abundant—cell phones with slightly different features. They offered the real value people wanted and were ready to buy at a premium.

Why do consumers still shop at old-fashioned retailers when they can buy cheaper on-line? It is because they can touch, feel, and compare products. Also, buying on the web is a lone experience; shopping becomes an outing for the family on a Saturday morning. Everyone participates, and you can have lunch together at Target. Or, you can get a cheap hot dog and a drink at Costco, along with cheap gas and a carwash.

With the abundance of e-mail, what is the true value of Facebook or Twitter? They have attracted the buzz for creating social networking; it is like hosting a big cocktail party. But making money is their challenge—it is free and nobody shops. They must find scarcities, things everyone at the party needs, which they can sell, without driving away the crowd. They do not yet have a “scarcity” revenue model. That is the challenge: To monetize social networking without ruining the atmosphere.

Related links:

• Searching For Scarcity:
  http://www.forbes.com/2009/06/23/u2-scarcity-disruptions-intelligent-technology-hardy.html?partner=alerts
• The problems of Scarcity & Abundance:
  http://www.jimpinto.com/writings/abundance.html
• Where Social Networking Cashes In:
  http://www.forbes.com/2009/06/18/social-networks-facebook-intelligent-technology-bazaarvoice.html?partner=relatedstoriesbox

Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto’s Points, at www.jimpinto.com/writings/points.html.