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Sell Less, Earn More: Using Scarcity to Boost Revenue

by John Mullins

7 minute read

    NFO_01The scarcity model is perhaps the most ingenious out of the five types of customer-funded models since it allows you to earn more from selling less. This tactic also takes advantage of the fact that retailers often do not have to pay their vendors up front. Given these parameters, the scarcity model is especially useful in retail, although not limited to it.


    The model is also, perhaps, the most difficult to pull off successfully. While the scarcity model can generate lots of customer cash, some have found it difficult to make scarcity profitable over the long term.

     

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    Here, we will investigate why some companies only achieved short-term success with scarcity, and how others found innovative ways to use this customer-funding method to their advantage.

     

    Creating A New Category Of Retailing
    With Scarcity

    Scarcity models are nothing new. High-end designer apparel and other luxury brands have been using scarcity to portray exclusivity for years — you won’t find Prada or Gucci on every street corner.

    At one point in time, scarcity for these high-end brands was achieved through limited quantity.
    Then, vente-privee.com entered the picture with an ingenious new way of using scarcity. They found a way to make fast sales while solving overstocked problems for merchants and suppliers.

    scarcity_quote01Vente-privee.com was founded by Jacques-Antoine Granjon and his seven business partners. Prior to founding
    the e-commerce company, Jacques-Antoine already had years of experience distributing manufacturers’ overstocked inventory through a variety of events that would not disrupt the carefully honed brand images of their upscale suppliers.

    In 2000, Jacques-Antoine was inspired by new technologies. Connecting the dots between his experience in clearance through events with the internet’s ability to create a virtual store, Jacques-Antoine ideated and pioneered the online flash sale model.

    His idea led him and his business partners to launch vente-privee in France in January 2001. The simple concept was based on the French phrase vente privée, which means “private sale.” Here’s how their model worked:

    From time to time, vente-privee would send an email to their members informing them of a “private sale event” happening in 48 hours. Two days later, the limited quantity merchandise would go on sale, but not for long. The sale would last for just three to five days, with the goods priced 50-70% below the designer brands’ retail price.

    Vente-privee members would enjoy a huge discount on designer brands. On the other hand, the brands could get rid of unwanted inventory in an exclusive manner that didn’t tarnish their image, because the discounted price was only available to members and not the public.

    scarcity_quote02After the sale, vente-privee would pay its manufacturers and vendors for the items sold. By having their customers’ cash in their hand before having to pay their vendors for the inventory, vente-privee had the funds to expand quickly.

    Just two years after its inception, vente-privee was selling more than 200,000 items each day to its 1.8 million members across eight European countries, collecting revenues amounting to 1.6 billion euros in a year. By 2013, they had grown to 2100 employees worldwide.

    Jacques-Antoine’s ingenious idea of applying scarcity in an online flash sale format transformed the method of selling end-of-season, excess, and overstocked pieces for high-end designer brands. Unsurprisingly, others began imitating the flash sale format that vente-privee pioneered, and an entire new category of retailing was born.

     

    Replicating The Success Of Flash Sales (But Not For Long)

    One of the copycats that replicated the success of ventee-privee’s flash sales is Totsy, a company focusing on goods for babies and children aged zero to seven at deeply discounted prices.

    Unlike ventee-privee which relied on customer funding to grow, Totsy raised $5 million in venture capital. Then in August 2012, they raised another $18.5 million. By November 2012, Totsy had more than 100 employees serving 3 million members.

    Things were looking bright for Totsy, but not for long. Totsy was using VC money to spend aggressively to expand its member base. Although they rapidly grew in membership, only 10.8% of those who signed up as Totsy members had actually become paying customers.

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    The result? By May 2013, Totsy crashed, laying off all of its employees. Although Totsy’s revenue in 2012 had reached $16.9 million, it incurred $22.9 million in losses.

    A similar fate unfolded for Lot18, a company that provides access to high-quality wines from around the globe at the best possible prices through flash sales. With $3 million in capital added to an earlier $500,000 seed round, Lot18 launched in November 2010.

    Like Totsy, Lot18’s early months were promising. They gained 200,000 new members and sold thousands of bottles each week. Their monthly revenue quickly exceeded $1 million. With this excellent start, Lot18 received more funding — first $10 million, followed by another $30 million in November 2011. After that, Lot18 acquired Vinobest, a similar French business, just a year after launching.

    But then, in January 2012, just weeks after the Vinobest acquisition, Lot18 laid off 15% of its employees. A few months later, four senior executives departed. By May 2013, after yet another round of layoffs, the company was left with just 36 employees. In addition, both of its co-founders had departed and in July 2013, the company closed its UK office, which it had opened a mere four months earlier.

    scarcity_quote03aThe key takeaway from these case studies is that companies like Totsy and Lot18 relied on VC much too soon. Although the scarcity element and cash pumped from VC rapidly grew their membership and gave them a promising start, in the end they failed to achieve long-term profit.

    On the other hand, ventee-privee focused on driving revenues and engagement because they relied on customer funds to grow. Only after they achieved consistent growth, which validated their business, did they rely on VC to expand. In July 2007, Summit Partners acquired a 20% stake in vente-privee.com. The funding helped the company expand in Europe: first in Spain and Germany, then in Italy and UK, and more recently in Belgium, Austria and the Netherlands.

     

    Innovative Ways To Make Scarcity Work With Customer Funds

    We have seen how vente-privee grew their business through a customer-funded scarcity model based on flash sales, while those that tried to imitate the flash sales model through venture capital could not sustain long-term success. Now, let’s look at how other companies innovatively applied the scarcity model to grow with their customer’s funds.

    Zara, the Spanish fashion apparel chain, found an innovative way to apply scarcity in the fashion industry without relying on flash sales. They would follow “who’s wearing what” on stage and on the fashion runway, and then copy it very quickly. Something that was worn by celebrities one week on stage could hit Zara stores in just a couple of weeks. However, Zara wouldn’t ever order the same design again.

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    Because Zara controls the supply of what it sells, when they “forecast” well, they can “manufacture” and control the limited supply in the styles they create. Their customers know this and know that if they see something they like in Zara, they better buy it now or it would be gone forever. This scarcity in quantity also encouraged young fashionistas to visit Zara often so they don’t miss out on the latest styles they might want.


    Outside of the fashion industry, a restaurant in Austin, Texas has figured how to use scarcity to sell their barbecue. The restaurant, Franklin’s BBQ, opens at 11am but when their barbecue is gone — it’s gone. Their customers know that, and they will be queuing up in line starting as early as 6 in the morning. Their customers are willing to bring picnic chairs and beanbags to make themselves as comfortable as possible while they wait, just to make sure they get the barbecue they want.

    scarcity_quote04aA recent innovation using scarcity can be seen with Revolut, a digital banking alternative that includes a prepaid debit card, currency exchange, cryptocurrency exchange and peer-to-peer payments. Revolut ingeniously combined scarcity with subscriptions, another customer-funded model. Recently in August 2018, Revolut launched Revolut Metal – their new contactless metal card. Only 10,000 metal cards are available and they are reserved for their Premium customers who have to pre-register for the exclusivity of owning one.

    In addition to this scarcity, the metal cards are packaged with a £12.99 monthly subscription packages that give their Premium customers exclusive benefits, from free medical insurance to instant cryptocurrency access and cryptocurrency cashback. By combining scarcity with a subscription to exclusive services, Revolut has not just made more sales by selling less, they have also secured recurring revenue to maximize the customer funds they raise for growth.

     

    3 Important Lessons To Make Scarcity Work

    How can you make scarcity models work? There are three important lessons we can learn from the case studies in this article.

    First, at the heart of the scarcity model is the truism that the customer must pay before vendors are paid. The margins that the business generate must be sufficient to cover the day-to-day costs of running the business and generate profits, unless growth is pursued at a lightning pace. It’s easy to be blinded to the profit reality in a business where the customers always keep it flush with cash. But sooner or later, profits will be essential.

    Second, the case studies we covered here that got started with venture capital struggled to make enough long-term profit or experienced management turmoil. Vente-privee did not start with VC, and its proven profitability from customer-funded growth secured its long-term success. This shows the advantage of customer-funded scarcity before jumping on the VC bandwagon too soon.

    Last, companies like Zara, Franklin’s BBQ, and Revolut that have found innovative ways to apply scarcity suggest that scarcity models can work under the right circumstances without venture capital.

    So whether you’re an entrepreneur looking for a business model that can grow or a corporate innovator seeking to jump-start your company’s growth, scarcity models — in a variety of industry settings — appear to hold considerable potential.

     

    Are You Ready to Stand on the Shoulders of Giants?

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    John Mullins

    John Mullins

    Associate Professor of Management Practice in Marketing and Entrepreneurship. An award-winning teacher and scholar and one of the world’s foremost thought leaders in entrepreneurship, John brings to his teaching and research 20 years of executive experience in high-growth retailing firms, including two ventures he founded and one he took public. Since becoming an entrepreneurship professor in 1992, John has published five books, dozens of cases and more than 50 articles in a variety of outlets, including Harvard Business Review, the MIT Sloan Management Review, and The Wall Street Journal. His research has won national and international awards from the Marketing Science Institute, the American Marketing Association, and the Richard D. Irwin Foundation. He is a frequent and sought-after speaker and educator for audiences in entrepreneurship and venture capital.

    Profesor asociado de gestión en marketing y emprendimiento. Es un profesor galardonado, y uno de los principales líderes mundiales en pensamiento emprendedor, John aporta a su docencia e investigación 20 años de experiencia ejecutiva en empresas de rápido crecimiento, incluidas dos empresas que fundó y una que hizo pública. Desde 1992 ha publicado 5 libros, docenas de casos de estudio y más de 50 artículos en reconocidos medios como Harvard Business Review, MIT Sloan Management Review y The Wall Street Journal. Con sus investigaciones ha ganado premios nacionales e internacionales del Marketing Science Institute, la American Marketing Association entre otros. Es un orador muy solicitado para conferencias sobre emprendimiento y capital de riesgo.