Artificial Scarcity For Entrepreneurs, Not Just Economists

Ryan Freitas @ Plinky pointed me to Aaron Schwartz’s riff on 37signals’ advice on how entrepreneurs should launch startups using the “Holywood method” (teaser, preview, launch).

Aaron makes a solid point that web sites are not movies. Movies are fixed content. They are what they are. All the tweaking has been done prior to launch during editing (after test screenings and other ways to gather feedback). Movies are also easy to grasp–a couple of hours in a dark room, you get the point, you go home. Most Web sites are constantly evolving. They could also be deep and take much longer than two hours to explore.

If your product is like a Holywood movie then perhaps the Holywood launch might work for you. Truth be told, most of the sites that 37signals launches are clean, simple, easy to understand and of pretty high quality.

For others, Aaron’s suggestion is to go with the Gmail model of creating artificial scarcity. Aaron doesn’t use the term himself but quotes mojombo:

Artificial scarcity is a great technique to generate excitement for a product while also limiting growth to a rate that won’t melt your servers. We worked through a huge number of problems and early users gave us some of the ideas that have defined GitHub. By doing a Hollywood launch, things would have been very different and I am convinced, very much worse.

I’m a big fan of artificial scarcity as a way to gain leverage. I don’t think startups use it enough. The broader concept can be applied to many situations in addition to how to launch web sites.

I learned about artificial scarcity first in my highschool economics class. Apparently, in the 80s the US government threatened Japanese car makers with tariffs because they saw their vehicles as threats to Detroit manufacturers. The Japanese, being both smart and courteous, replied along the lines of “Oh, we are so sorry. We understand your concerns. No need to impose tariffs. We will impose voluntary export restrictions to lower the quantity of Japanese vehicles entering Europe.” The result was that consumers ended up paying more for Japanese cars, just as they would have under a tariff. However, the additional revenue went into the bank accounts of the Japanese auto-makers as opposed to the US government coffers. (For the econ geeks, supply became perfectly inelastic at the voluntary export restriction level, leading to a jump in vehicle price and profit/vehicle.)

Not everyone is a fan of articifical scarcity as it, perhaps unfairly, advantages businesses. Some more discussion on the topic here and here.

About Simeon Simeonov

I'm an entrepreneur, hacker, angel investor and reformed VC. I am currently Founder & CTO of Swoop, a search advertising platform. Through FastIgnite I invest in and work with a few great startups to get more done with less. Learn more, follow @simeons on Twitter and connect with me on LinkedIn.
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