Artificial Scarcity Does NOT Get You Artificial Customers

In a post yesterday about the necessity and benefits of ‘friction’, Seth Godin circled around the basic economic concept of ‘scarcity’ where there are infinite human wants and limited resources.

We all know that software and the internet make resources seem infinitely consumable (non-rival) with their typical diminutive production cost or COGS despite the risky and immense development cost. As Godin mentions, without any sort of ‘friction’ or value placed on consumption, there is a lot of spam and lack of quality, for example, on Craigslist because it is free.

Thinking about artificial scarcity in a slightly less pure economic sense, it is a very important concept especially for SaaS startups. Since the relationship with the customer is ongoing and dependent on the annuity, startups need to allocate their resources to the right customers and partners–to those that add value and won’t churn. Some of the most successful partner programs and models that I’ve seen are where a partner pays for certification and can then resell the solution—this filters the partners, generates revenue for the company, and the company can focus on providing the highest value to the right, committed partners. This holds true for direct models as well.

While it may seem easier to acquire the customer initially by having your offering for free or with an exceptionally low price, you will probably misallocate your time to customers that should not have signed up to begin with. While in Beta stages, this is necessary for feedback, when you want to grow into a large company, you need the correct monetary commitment to acquire and maintain the most appropriate target customers and partners. There will be higher quality and focus on the most valuable needs for your customers and partners, which will result in a longer more mutually beneficial relationship.

While I’ve made these broad generalizations, there are, of course, exceptions and tweaks to this concept but Enough Said for today…