Does Product Scarcity Help Sales -- or Hurt Them?

Last Updated Jun 9, 2010 6:31 AM EDT

We may always want what we can't have, but that doesn't mean we'll like it when we get it. The same is true of your customers, according to Lusting While Loathing, a Stanford study that explores the effects of creating product scarcity on long-term brand loyalty. The research has important implications for anyone charged with inventory management, says professor Uzma Khan (pictured), who co-authored the paper with Ab Litt and Baba Shiv. In one experiment, participants were assigned to either a "jilted" or "non-jilted" condition. Subjects in both groups played a series of games. The non-jilted individuals were told they had won the games and a prize. The jilted ones were informed they had lost and would get no prize. Later, the jilted participants indicated a greater willingness to pay for the prizes than did the non-jilted ones. But they were also more likely to trade them away once they obtained them. A subsequent related experiment refined and confirmed these findings.

While it's long been known that scarcity can boost demand -- consider the pre-launch, limited-quantity hype surrounding the iPhone -- Khan says her research breaks ground regarding the downstream consequences of out-of-stock situations, whether strategic or inadvertent. She says that, as a manager, you must consider your long-term goals should you choose to create a false scarcity. If you're looking to boost short-term sales, an inventory reduction may do the trick. But if you seek long-term customer satisfaction, that strategy may backfire.

In the case of an unintentional stockout -- perhaps due to production or distribution problems -- Khan says managers must also be aware of the impact on customers likely to feel jilted. "You may need to put more effort into post-sales customer service," she says.

She also notes that inventory management is crucial when it comes to keeping your retail channels happy. "If Walmart is out of Pantene, the customer will go to Target," Khan says. Any possible short-term benefit created by the scarcity at Walmart will adhere to manufacturer P&G, and not to the store.