The Law of Demand

All businesses want people to see their products and services as valuable and desirable. As designers and marketers, we can leverage two social psychology principles, the “Veblen Effect” and the “Scarcity Effect” to accomplish this.

The “law of demand” states the price of a product and its demand are inversely related. In other words, the higher the demand for a good, the higher its price.

Given the two equivalent products, a lower price will increase demand, and a higher price will decrease demand. This principle of supply & demand is how economics and pricing worked for most of history.

For normal products, the higher the demand, the higher the price (source).

The Veblen Effect

However, at some point, an economist discovered the exception to this rule. He named this exception “The Veblen Effect,” which was defined as “the tendency to find a product desirable because it has a high price.”

This effect is mostly associated with luxury products and services like art, clothes, cars, fine wins, hotels, etc.

For Veblen goods, the higher the price, the higher the demand (source).

However, principles of the “Veblen Effect” can still be leveraged for products and services in more of a mass-consumer market as well.

Veblen believed this phenomenon was due to humans’ innate desire for status and to rise above the competition.

He classified this concept into two factors: “Pecuniary Emulation” and “Invidious Comparison.” Note that for this to work, the good or service must be visible to others, associated with status and affluence, distinguishable from competitors and knockoffs, and priced high relative to its competitors.

Pecuniary emulation is the desire to be perceived as belonging to the upper classes. An example of “Pecuniary Emulation” is when somewhat individuals tend to purchase expensive fine wines, even though studies have proven there’s little correlation between price and taste.

Despite this, when people see an expensive bottle, they automatically believe it tastes better (even when they faked the price tag in certain studies).

Invidious comparison is the desire not to be perceived as belonging to the lower classes. An example of “Invidious Comparison” is when middle-class individuals tend to shop at Target instead of Walmart because they don’t want to be associated with Walmart’s perceived social class.

Veblen Effect Strategies

There are a couple of tactics you can employ to market a luxury product using the “Veblen Effect.” Promote associations with high-status individuals (e.g., celebrities). Ensure that form factor and branding clearly and memorably distinguishes your product or service from its competitors.

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Figure out methods to discourage knockoffs, including legal protection (e.g., trademarks and patents), watermarking, and extensive counter-advertising. Price products higher based on the intangible aspects (i.e., brand associations) instead of marginal cost.

Scarcity Effect

If your product is more catered towards mass appeal, the “Veblen Effect” might be of limited use. In this case, you can leverage the “Scarcity Effect” to achieve a similar promotion result.

The “Scarcity Effect” is when people place a higher value on an object or opportunity that is scarce or rare — especially if others compete with us.

For example, diamonds are worth more than rocks because rocks are more abundant. However, this is effect leverages perceived scarcity rather than actual scarcity.

Most luxury products and premium services are marketed as more scarce than they are. This practice is called “artificial” scarcity, which is a debatably unethical yet powerful tactic. The “Scarcity Heuristic” explains why “artificial” scarcity works so well.

A heuristic is an imperfect set of mental rules people use to help them make fast but sub-optimal decisions. In this case, people use how scarce and rare something is to make rapid a decision on its value.

For example, if you enter a store and see many people fighting to buy something with minimal stock, you’d assign a high value to that product without deep consideration.

All of a sudden I want seafood now (source).

There are tons of heuristics relevant to UX that often cause many cognitive biases that we, as designers, can use for good or evil.

The “Scarcity Effect” is so powerful that even people otherwise disinterested find themselves motivated to act when products and opportunities become scarce.

We see this phenomenon applicable across the entire spectrum of human behavior ranging from mate attractiveness and selection (Romeo and Juliet Effect) to negotiation tactics.

Few principles move humans more than scarcity.

Scarcity Effect Strategies

There are five proven tactics to leverage the “Scarcity Effect” artificially.

The first tactic is “exclusive information.” This tactic is about telling people that supply is about to be depleted, and only a few people have this knowledge.

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For example, many online courses will tell their Youtube viewers that only a certain number of enrollment spots are left. Because this information is delivered through a specific channel, people within that channel believe they have exclusive knowledge that others do not.

The second tactic is “limited access.” This tactic is about limiting access to the supply of the product or opportunity.

For example, most airports will have exclusive airline lounges that you can only purchase a pass to if you’re a member who has met specific requirements. Customers who meet the requirements (often deceptively easy to achieve) believe that the product or opportunity is more desirable since it feels more exclusive.

The third tactic is “limited time.” This tactic is about making the supply available for a limited time.

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For example, many restaurants will have seasonal menu items that are only available between a set date. These items are usually more expensive but still manage to sell well due to leveraging this aspect of the “Scarcity Effect.” In general, people don’t like missing out on unique time-bound opportunities.

The fourth tactic is “limited number.” This tactic is about limiting the number of units within the supply.

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For example, most e-commerce stores will show the exact amount of stock left on the product page. Some businesses take this even further and announce limited edition items with a limited amount of them in production (and circulation).

Luxury retail businesses do an excellent job of considering scarcity in advertising and promotions. Scarce items are always valued more than plentiful items.

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Research has shown display windows that show a lot of a product will sell less quickly than displays that show small amounts. Just because you have the inventory doesn’t mean you need to show it.

The fifth tactic is “suddenness.” This tactic is about limiting the number of units within the supply.

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For example, most booking platforms will show a live decreasing stock timer for the number of bookings left. Some websites take this a step further and show a banner along the lines of “this has just been booked X times” making the remaining slots much more desirable.

When competition for scarce resources is visible and direct, the effects are contagious.

We often see this at auctions, where competing bidders become fixated on winning even at the cost of bidding above market value. This effect is most potent when the product or opportunity is unique and not easily obtained or approximated by other means.

Scarcity Effect on Steroids

Two modifiers that I touched on before can amplify the “Scarcity Effect.” They are “New Scarcity” and “Competition Scarcity.”

“New Scarcity” occurs when our irrational desire for limited resources increases as we move from a state of abundance to scarcity.

For example, if there was a specific bottle of wine, you liked that was always suddenly discontinued. You’d put a much higher value on that bottle in the future and would likely be willing to pay a premium whenever you encountered it at a store.

Competition scarcity occurs in situations where others are competing with you over scarce resources.

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For example, hotel websites will sometimes have a banner showing “8 other people are looking at this room, three rooms left”.

Knowing that other people are currently considering the same product induces the “Competition Scarcity” modifier. It makes those rooms seem much more valuable than a banner showing “there are three rooms left.

How Universities Leverage These Effects

An interesting case study involving both the “Veblen Effect” and “Scarcity Effect” is how universities price their programs and setup admission.

To increase enrollment rates and address complaints about the rising costs of education, the board reduced tuition costs and increase enrollment spots.

Unexpectedly, this led to a decrease in perceived quality of education and the school’s prestige, leading to a reduction in enrollment (demand). When the school increased tuition costs and restricted the number of spots per program, they saw an increase in enrollment.

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However, this had the negative effect of making it look like they were price gouging students with something they needed but couldn’t afford.

The brilliant solution adopted by many schools was to increase tuition costs while increasing financial aid availability simultaneously.

Some universities have also adopted the tactic of limited access, where they show the average GPA of students accepted into the program.

This revised tactic subconsciously pushes students with high grades to enroll in more competitive and often more expensive programs. Furthermore, this new perception maintains the school’s prestige while also appearing benevolent to financially worse students.

Conclusion

These tactics need to be implemented with caution, as too much discounting or blatant artificial scarcity will undermine their effects.

To maintain the illusion of scarcity, many luxury brands would often destroy their unsold products instead of selling them at a discount to increase the product’s circulation.

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As consumers, we should understand both effects to avoid cognitive biases that might make us spend more than we’d like. As designers, we should be conscious of these effects and use them responsibly if we have to. As marketers, I suppose you have the tough job of treading this fine line.