Smart Money Details Economics of Sold-Out Products
Saturday, December 27, 2008
"Footage of people lining up around the block...helps generate publicity"
So, now that the Christmas shopping season has come to an end once again, you're off the hook for that Nintendo Wii Fit for another year - or at least until Junior's birthday. Which is a good thing, since you weren't too keen on paying upwards of $300 for the popular gaming system that retails for $89 but is ever in short supply. Better that the spouse wasn't sweet on Amazon's Kindle, the e-book system that is now all the rage - 'cause they were impossible to get.
But why? How can it be that companies that ought to be eager to sell their popular wares during a global recession can't seem to make enough of them? With roots in the scarcity that makes the auction culture function, the answer, according to a Smart Money piece from last week, might be smart strategy:
If you've put off your holiday shopping to the last minute, good luck trying to get your hands on Nintendo's Wii Fit or the Kindle electronic reader from Amazon (AMZN: 51.78, +0.34, +0.66%) at the retail price.
The Wii Fit - a fitness video game for the Wii gaming system - is in such high demand that it's selling for as much as $300 in Amazon's Marketplace, more than three times as much as its retail price of $89.99. Then there's Amazon's Kindle, which is currently sold out. Prices have recently soared as high as $700 on eBay (EBAY: 13.60, -0.05, -0.36%) - almost double the $359 retail price. Those not willing to pay that eBay premium will have to wait 11 to 13 weeks for the device to arrive.
Wondering why in this modern age of high-tech production and inventory management -- when a personalized iPod from Apple (AAPL: 85.81, +0.77, +0.90%) can be shipped directly from the factory to your door in just three to five business days -- it's so hard for some big-name companies to meet demand for hot products they've had on the market for months?
In the case of the Kindle, Amazon says it was blindsided by a surprise October endorsement by Oprah Winfrey that sparked such high demand that the company couldn't keep up.
Meanwhile, Nintendo says it's been in overdrive trying to meet demand for the Wii Fit since May when it first came out. "Remember that this is not simply a matter of pressing more discs," says Denise Kaigler, a spokeswoman for Nintendo of America.
Of course, sometimes it isn't a bad thing for a company when there isn't enough product to go around. You might assume it's good business to sell as many units as possible, but economists we spoke with say scarcity can also do wonders for a company's sales.
Not only does news footage of people lining up around the block when a new shipment of Wii Fits arrives at Best Buy help generate publicity, but it also makes people want that product even more. 'There may be some type of bandwagon effect," says Lawrence White, professor of economics at New York University's Leonard N. Stern School of Business.
And when a shopper knows a product is in short supply, they tend to feel more of an urgency to purchase it immediately when they come across it in a store, says Michael Mazzeo, management and strategy professor at Northwestern's Kellogg School of Management. Such hot demand not only boosts sales, but it also means that the manufacturer doesn't have to resort to discounting in order to clear shelves -- a move most companies have had to make amid slow consumer spending this holiday season.
Below, a look at some notable shortages in recent history:
1981: Japanese cars. In 1981, Japanese automakers agreed to a voluntary export restraint that limited the numbers of vehicles they would sell in the U.S. It made Detroit happy - but wound up also helping to create more demand for the foreign cars. As a result of the scarcity, Japanese automakers were able to raise their prices by 14%, according to a study by the Property and Environment Research Center, a Bozeman, Mont.-based environmental research institute.
1983: Cabbage Patch Kids. Remember those funny little dolls with the squishy faces? During the holiday season of 1983, parents were practically knocking each other down in the hopes of scoring a Cabbage Patch Kid with a birth certificate for their child. Shoppers faced long waiting lists before the craze died down in 1985.
Late 1990s: Beanie Babies. Manufacturer Ty was careful not to flood the market with these plastic pellet-stuffed animals. The company had a well-publicized marketing strategy of only selling what was perceived to be a limited number of each design before retiring them, which helped to maintain the value and popularity of these little critters, says White of the Leonard N. Stern School of Business. The toys soon rose to the level of collectibles and, with the advent of eBay, the product's popularity soared. In online auctions, the bids kept going higher for these hard-to-find dolls.
So, now that the Christmas shopping season has come to an end once again, you're off the hook for that Nintendo Wii Fit for another year - or at least until Junior's birthday. Which is a good thing, since you weren't too keen on paying upwards of $300 for the popular gaming system that retails for $89 but is ever in short supply. Better that the spouse wasn't sweet on Amazon's Kindle, the e-book system that is now all the rage - 'cause they were impossible to get.
But why? How can it be that companies that ought to be eager to sell their popular wares during a global recession can't seem to make enough of them? With roots in the scarcity that makes the auction culture function, the answer, according to a Smart Money piece from last week, might be smart strategy:
If you've put off your holiday shopping to the last minute, good luck trying to get your hands on Nintendo's Wii Fit or the Kindle electronic reader from Amazon (AMZN: 51.78, +0.34, +0.66%) at the retail price.
The Wii Fit - a fitness video game for the Wii gaming system - is in such high demand that it's selling for as much as $300 in Amazon's Marketplace, more than three times as much as its retail price of $89.99. Then there's Amazon's Kindle, which is currently sold out. Prices have recently soared as high as $700 on eBay (EBAY: 13.60, -0.05, -0.36%) - almost double the $359 retail price. Those not willing to pay that eBay premium will have to wait 11 to 13 weeks for the device to arrive.
Wondering why in this modern age of high-tech production and inventory management -- when a personalized iPod from Apple (AAPL: 85.81, +0.77, +0.90%) can be shipped directly from the factory to your door in just three to five business days -- it's so hard for some big-name companies to meet demand for hot products they've had on the market for months?
In the case of the Kindle, Amazon says it was blindsided by a surprise October endorsement by Oprah Winfrey that sparked such high demand that the company couldn't keep up.
Meanwhile, Nintendo says it's been in overdrive trying to meet demand for the Wii Fit since May when it first came out. "Remember that this is not simply a matter of pressing more discs," says Denise Kaigler, a spokeswoman for Nintendo of America.
Of course, sometimes it isn't a bad thing for a company when there isn't enough product to go around. You might assume it's good business to sell as many units as possible, but economists we spoke with say scarcity can also do wonders for a company's sales.
Not only does news footage of people lining up around the block when a new shipment of Wii Fits arrives at Best Buy help generate publicity, but it also makes people want that product even more. 'There may be some type of bandwagon effect," says Lawrence White, professor of economics at New York University's Leonard N. Stern School of Business.
And when a shopper knows a product is in short supply, they tend to feel more of an urgency to purchase it immediately when they come across it in a store, says Michael Mazzeo, management and strategy professor at Northwestern's Kellogg School of Management. Such hot demand not only boosts sales, but it also means that the manufacturer doesn't have to resort to discounting in order to clear shelves -- a move most companies have had to make amid slow consumer spending this holiday season.
Below, a look at some notable shortages in recent history:
1981: Japanese cars. In 1981, Japanese automakers agreed to a voluntary export restraint that limited the numbers of vehicles they would sell in the U.S. It made Detroit happy - but wound up also helping to create more demand for the foreign cars. As a result of the scarcity, Japanese automakers were able to raise their prices by 14%, according to a study by the Property and Environment Research Center, a Bozeman, Mont.-based environmental research institute.
1983: Cabbage Patch Kids. Remember those funny little dolls with the squishy faces? During the holiday season of 1983, parents were practically knocking each other down in the hopes of scoring a Cabbage Patch Kid with a birth certificate for their child. Shoppers faced long waiting lists before the craze died down in 1985.
Late 1990s: Beanie Babies. Manufacturer Ty was careful not to flood the market with these plastic pellet-stuffed animals. The company had a well-publicized marketing strategy of only selling what was perceived to be a limited number of each design before retiring them, which helped to maintain the value and popularity of these little critters, says White of the Leonard N. Stern School of Business. The toys soon rose to the level of collectibles and, with the advent of eBay, the product's popularity soared. In online auctions, the bids kept going higher for these hard-to-find dolls.
posted by Chris and Frank at 2:32 PM
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