How to Make More by Making Less
Sep 19, 2022
Rolling under the umbrella of economics, we are all well versed with the law of supply and demand. The lower the supply, the higher the demand, higher the price. This law of demand and supply make way leeway for the scarcity principle to creep in.
Scarcity as a prodigy goes beyond economics and is entrenched in human psychology. It is scarcity that grabs our attention and alters how we think. Staying at the top of our minds affects what we notice, how we weigh our choices, how we deliberate and, ultimately, what we decide and how we behave. A scarce item is bound to create more sensation and is considered more attractive. The strategized shortage sensation of the product compels the purchase quicker. Scarcity as a principle makes the products more desirable, speeding up the overall decision process.
Macro Market Analysis
India has emerged as one of the largest consumer economies globally. The $810 billion Indian retail market is the fourth largest in the world and is quickly evolving to include a sizeable e-retail component. While India is home to the third-largest online shopper base of 140 million, the Indian market is still highly untapped with intense potential to reach India’s large internet user base of approximately 625 to 675 million people.
The Indian E-commerce industry is growing manifold due to the dynamic mindset of Indian customers and the ease of shopping online. Major Indian E-commerce companies have come up with plans and schemes year on year to entice customers.
As reported by IBEF, the Indian E-commerce industry has been on an upward growth curve and is expected to outshine the US to become the second-largest e-commerce market in the world by 2034. India’s e-commerce sector is expected to reach US$ 111.40 billion by 2025 from US$ 46.20 billion in 2020, growing at a 19.24% CAGR, with grocery and fashion/apparel likely to be the key drivers of incremental growth.
Today, online retail represents a small fraction of the e-commerce domain and is one of the fastest-growing sectors. Hence, the macro-market in India is a very attractive one for retailers who offer apparel online (such as Zara). This is the case even though there is a challenge to ensure that the supply chain needs of specific product segments rely heavily upon nascent logistics and delivery infrastructure support in India.
Of course, no matter how large and fast-growing a market may be, most successful businesses rather than targeting the entire market, identify a much smaller segment of customers within the overall market. Using this scope, Zara target the mass-market consumer.
Moreover, secondary research indicates that Indian consumers do consider fashion as a key dimension of apparel choice, the typical Indian luxury shopper is more value-conscious. Therefore, the Zara model is more relevant in India than the most luxury- model in terms of customer-oriented preferences.
India has occupied the focal point in the fashion industry, with an expeditiously growing middle class and robust manufacturing sector. The Indian apparel market is projected to cross $59 billion in 2022, to emerge as the sixth largest in the world. Transitioning from a vital sourcing hub, according to McKinsey’s Fashion Scope, India will now become one of the most attractive consumer markets outside the helm of the western world.
The retail industry in India is acknowledged as a sunshine sector and is driven by factors like strong income growth, changing lifestyles and favourable demographic patterns. Having signified its presence in metros and Tier I cities, retailers are captivated by the possibilities in Tier II and III cities like low-cost real estate and shifting consumption patterns of consumers who are progressing into affluent lifestyle purchases.
Zara’s Scarcity Success Story
Scarcity models have been in the business game for a long time. The classic example purporting the same is that you don’t find Prada or Louis Vuitton on every street corner. But Zara, the giant Spanish fashion retailer, rocked the scarcity model, taking it to new heights.
While all the sellers aim to sell as much of everything as possible, in the scarcity model the sellers regulate the sale in time and quantity. The idea is to create an urgency for the consumers to buy now or regret it later. Short production runs create scarcity of given designs and that generates a sense of urgency and reason to buy while supplies last. Consequently, Zara does not have lots of excess inventory, nor does it need to do big mark-downs on its clothing items. By controlling the manufactured quantity of each style, Zara establishes an artificial scarcity and reduces the risk of having stock it cannot sell. This business strategy allows Zara to sell more items at full price because of the sense of scarcity and exclusiveness the company exudes.
Zara as a brand restricts the design and style to a limited quantity and when it’s gone, it’s gone. Taking this approach, Zara has trained their customers to make immediate purchases as the possibility of the product being sold out is high. This compels the customers to visit the store regularly, so they don’t miss out on the collection.
Zara created the fast fashion model. They spot the trend, their designers create based on the trend, and the product gets from the designer’s table to the shelves in less than three or four weeks and it’s not there for long. Maintaining a tight supply chain and a fast process has resulted in Zara becoming one of the most profitable and highly valued retailers in the world.
Impact on Customers
Zara-like business clasped to the scarcity model is well suited to address the Indian consumer market. In the current scenario with the disposable income of the customers showing an upward trajectory, online spending has also increased. By certain studies, factors like the frequency of online shopping have a significant impact on the likelihood to shop during flash sales. This suggests that the higher the frequency of online shopping higher is the likelihood to shop on flash sales.
Young and middle-aged consumers, majorly women from the 24-35 years of age group are more likely to shop on flash sales and give in to the scarcity models in comparison to older consumers. Exposure to the internet and social media adds to certain personality traits impacting their choices. Certain personality traits such as competitiveness, trending style, peer influence and fear of missing out impact consumers’ purchase decisions. Under such cases, the likelihood of a consumer buying under the scarcity model is higher.
Concerning the location, the charm of the scarcity model is much higher in the metro cities in comparison to the tier-1 and tier-2 cities. 20% of apparel is still bought in the country’s top metros, making the cities of Delhi, Mumbai, Bengaluru, Chennai etc, the largest consumers of apparel zones in India. The expanding purchasing capacity and knowledge of fashion and trends increased the scope of businesses like Zara to flourish in India.
As per the marketing framework, any sales promotion that limits the number of products offered for sale, time available to avail the offer or limits the offer to a specified set of customers, is referred to as scarcity appeal. Time scarcity creates time pressure, which is perceived as stressful. On the other hand, quantity scarcity refers to how much has been purchased by others, thus it helps form a symbolic benefit. The purchase intention/ attitude is positive for products/offers that possess scarcity appeal. Higher the time pressure faced by consumers, the higher the likelihood to buy on flash sales. The likelihood to purchase on flash sales will be higher for quantity scarcity offers.
Learnings from Zara
Zara as a fast fashion brand caters to the wants of its customers faster than anyone else. With little spending on advertising and a high focus on consumer insights and trends, Zara relentlessly provides the best customer experience. By maintaining a super effective supply chain, Zara has over time involved customers too in the design process, giving it a competitive advantage.
By making small quantities of each style, you can maintain exclusivity. By reducing the manufactured quantity of each style, other brands too can create artificial scarcity and lower the risk of having stock it cannot sell yet creating a desperate urge in the customer to purchase the same.
With feedback at heart, Zara refines its designs from time to time. And, by bearing an innovative answer to both style and marketing, the way Zara changes its stock quickly, it keeps its shoppers motivated with a “now-or-never” choice.
The four fundamental success spices of Zara – a short cycle time for the creation of the product, a small quantity per product, an extensive variety of products every season and a massive investment in information and communication technology have allowed them to stay on the course.
With the world being dominated by big data and quick decisions, it is only smarter for the brands in India to embrace the approach adopted by Zara toward product development as well as customer service. The key is that a short supply of items compels people to presume that there is a shortage of items which ends up making customers want to buy more.
Customer insights are the holy dish of modern business, and the more companies know about their customers, the better they can innovate and strive. By adjusting the retail strategy around the scarcity model and decoding the consumer behaviour, the other brands too can create a FOMO for their products. It might be challenging at the beginning but does deliver colours of growth.
Less is more
Resorting to the scarcity principle to boost sales can be a successful persuasion strategy, but if done correctly. The persuasion method of scarcity can fail if you don’t keep up your promise, and make the item becomes available easily. The whole idea of this persuasion method is to make anything scarce more desirable.