The more there is available of something, the less it costs. Conversely, when there’s a limited quantity of that same something, the more it’s coveted and the more expensive it is. This is a rudimentary concept, but few companies know how to effectively manage the process to ensure they balance supply with demand in order to maintain or improve the profitability of a product or service. Of course, before you can maximize profitability, you must have something customers want, sometimes even before they know they need it.
Think about precious metals, fine diamonds and even stocks. The beauty and a portion of the intrinsic value of these things are effectively in the eyes of the beholder. In reality, much of their value or price is determined by the ease or difficulty of obtaining them.
As for equities, as soon as everyone who can own a given stock has bought it, then, in many cases, the only direction that stock can take is down because there are simply more sellers than buyers. On the flip side, when few people own a stock but everybody decides they want it, for whatever the reason, that stock may take a precipitous upward trajectory.
A case in point is Apple. At one time, when its per-share price was more than $400, $500 and even $600, everyone thought the sky was the limit and the majority of institutional funds and many home gamers, aka small individual investors, jumped on the bandwagon. The stock reached $705 a share in the fall of 2012, and just when all of the market prognosticators were screaming, “Buy, buy, buy,” there were too few buyers left (because everyone already owned it) and the stock fell out of bed. In many respects, Apple was still the same great company with world-class products, but there were simply more sellers than buyers and — poof — the share price evaporated, sending this once high-flying growth stock to the woodshed for a real thrashing.
The question for your business is how can you manage the availability of your goods or services to maximize profit margins? The oversimplified answer is once you have something of value, make sure that you create the appropriate amount of tension, be it requiring a waiting list to obtain the product or service or underproducing the item to create a backlog. However, this is a delicate balancing act, because if it’s too hard to get, then customers will quickly find an alternative, and your product will become yesterday’s news.
Some very high-end fashion houses, such as Chanel, have it down to a science. It can be very difficult to walk into a marquis retailer today and obtain one of its satchels without being made to jump through waiting-game hoops, just for the privilege of giving the store your money in exchange for the fancy schmancy bag. That stimulates demand and keeps the price up because customers tend to want something they can’t seem to get.
Michael Feuer co-founded OfficeMax in 1988, starting with one store and $20,000 of his own money. During a 16-year span, Feuer, as CEO, grew the company to almost 1,000 stores worldwide with annual sales of approximately $5 billion before selling this retail giant for almost $1.5 billion in December 2003. In 2010, Feuer launched another retail concept, Max-Wellness, a first of its kind chain featuring more than 7,000 products for head-to-toe care. Feuer serves on a number of corporate and philanthropic boards and is a frequent speaker on business, marketing and building entrepreneurial enterprises. Reach him with comments [email protected]
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