Scarcity: The ultimate reward for a strong intangible asset base

LONDON, ENGLAND - MARCH 8, 2019: Rolex Oyster Perpetual Day-Date white gold timepiece on window display at a authorized dealer near Knightsbridge. Travel and Swiss luxury watch industry.

Few things annoy a wealthy person more than being placed on a waiting list. But they always wait – especially when the item they desire is scarce.

The thing is, actual scarcity is itself rather scarce. Plenty of companies attempt to create scarcity, but few can pull it off. Releasing a “limited edition” set of 1000 items is only artificial scarcity, not actual scarcity. It can take years – sometimes centuries – to cultivate the kind of brand power or business model that can achieve actual scarcity.

Scarcity sits at the centre of the Venn diagram of all the major intangible asset classes. Scarcity is the natural outcome of managing all your other intangible assets to their maximum value.

Said differently, Rolex watches are valuable because Rolex knows how to leverage its relationships, customer data, industry expertise, patents, brand, design and confidential information to create a timepiece that is truly unique.

A product becomes “scarce” when customers believe it cannot be bought anywhere else.

There are many sports cars, but none of them are like a Ferrari. There are many Swiss watches, but Rolex will always have the edge. There are thousands of apartments in Manhattan, but only Billionaire’s Row feels like you’re living in New York City. There are many handbags, but only Hermès uses quality leather.

The Italian apparel company Hermès was founded in 1837 to sell leather saddles and harnesses to the French nobility, Hermès is now worth north of $US216 billion. The entire brand is dedicated to achieving actual scarcity – not artificial scarcity – all the way down to its shareholding structure. Even today, the Hermès family still owns two-thirds of the company to maintain the perception of a heritage brand.

Hermès could scale its business at any time by training hundreds of extra artisans, buying up major workshops and producing 100x the number of handcrafted bags. But that’s what its rivals Louis Vuitton, Dior and Fendi did. While those luxury brands do still command a hefty profit margin, only Hermès can claim its Birkin bags are handcrafted by a single artisan from start to finish, making them truly scarce.

No one knows how many Birkin bags are produced each year. But the total demand for its bags has stayed in the region of 10,000 to 1 since 1984 when they were introduced. Despite rumours that its retail stores never stock the bags, the stores often do have a few Birkins sitting out the back. But Hermès makes it impossible to simply walk into a store and buy one. All prospective buyers must follow the rules, no matter who they are.

Unfortunately, Hermès never explains those rules, which adds to its aura of scarcity. There may be a “waitlist,” but no such a list has ever been admitted to. The only way to buy a Birkin bag seems to be a mix of befriending a sales associate and spending a certain amount of money on other Hermès products. But customers won’t know when their smiles or spending is sufficient.

The other rule is that Hermès staff must believe the customer will represent the brand well. A Birkin bag on the arm of a low-status person would never get the nod of approval. What exactly is the “right” kind of person? That is completely up to the Hermès sales associates and brand managers. If they don’t like you, there will never be a new Birkin bag on your arm. It’s as simple as that.

Done right, scarcity can rocket any product into the fabled “market above the market.”

To explain this concept, each of us is born into the same market for normal goods and services. This market is open to all. However, there is another, higher market that only a tiny percentage of folk are ever invited to access. Not to be confused with black or grey markets, this kind of “para-market” is defined by the scarcity of its goods and services.

It’s not about money in this para-market, it’s about following a different set of rules. Many obscenely wealthy people are never invited to the para-market of scarcity because they don’t “fit” the idiosyncratic standards of a particular brand. Or maybe that wealthy person wasn’t in the right place at the right time, or they didn’t know the right things to say. Money is still needed to buy the scare items, but you need a different kind of currency to access this world.

Rolex operates almost exclusively inside this para-market.

Once again, it is mostly impossible to walk into a Rolex retail store and buy a watch. Some items will be sitting on cushions behind the bulletproof glass, but those are usually not for sale. In fact, the retail sellers will get in trouble from Rolex if they sell those watches! Anyone hoping to buy a new Rolex must go on a waiting list.

However, contra Hermès, a prospective buyer of a Rolex is told when they have made it onto the list. Once their watch is made – and it could take months or even years – Rolex will call the customer and inform them of the good news. But the customer only has moments to accept. If they delay, the sales associate will hang up and ring the next person on the list.

Those rules might sound like a terrible way to run a business. Yet these rules are themselves an intangible asset for Rolex or Hermès. The rules are practically a form of confidential information, since only the owners see who is on the list and how many of its luxury items need to be produced each year.

Rolex and Hermès know exactly who its customers are, how much they spend and which products they desire. This is all valuable data for streamline manufacturing and marketing. The companies closely interact with their customers over many years, building strong relationships. And the strict rules reflect high production standards, resulting in a powerful and stable brand.

For Rolex and Hermès, scarcity is more than just a marketing strategy – it is an entire business model that any company can follow. Scarcity is not magic; it is simply the result of managing all your intangible assets correctly.

Most companies only know how to create artificial scarcity, which is not the same as actual scarcity. They believe the only way to squeeze a few extra dollars from customers is to release 100 items that all have some type of glitter. But there is nothing special about glitter and soon enough, consumers will notice this.

Artificial scarcity is the business strategy equivalent of putting nitroglycerin in your car – great for a few miles, but horrible for the engine.

Achieving actual scarcity takes focus, resources and, above all, patience, but it is an achievable intangible asset for any company that chooses to take its products or services seriously.

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