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How To Manage Your Inventory: Divide and Conquer

Relevant topics Archive, Strategy

  • Neuromarketing Principle:
    The variety and scarcity effect each have the potential to boost sales. The variety effect makes consumers want to have different alternatives. The scarcity effect holds that consumers want a product even more when they can see it is low in stock.
  • Application:
    Use both effects to maximize sales. Offering (truly) different options triggers the variety effect; having only one or two products of such an options sets of the scarcity effect.
  • When in Italy, my father-in-law has a proven technique for finding the best wine in the supermarket: By checking which shelf is the emptiest, he knows which wine is being drunk by the locals and thus is the best to get at that moment. In other words, he gladly uses the scarcity principle when being confronted with many choices in a fairly new and uncertain environment.

    However, it is impossible for shop managers to always be in low stock at all times to boost their revenue. In fact, there are many practical implications of having a high stock. For example, it is more likely that the shop has the preferred product. Additionally, contradicting the scarcity principle, consumers might infer from a very high stock that the product must also be very high in demand (and hence of high quality), increasing their liking for the product.

    So, which mantra should the shop manager follow? Is less really more?

    Scarcity Effect vs. Variety Effect

    According to Cialdini, scarcity is one of the six principles with which you can successfully persuade consumers. Building on both the need for uniqueness and a deeply-embedded loss aversion, many of us fight to get a table at that popular restaurant, buy limited edition sneakers, or seek the last bottles of on the wine shelf. For a shop owner, however, the scarcity principle has a huge disadvantage: When the shop runs out of a product, they can no longer sell it (even though there’s an increased demand), resulting in less than realizable profit.

    On the other hand, we do not like to be limited in our choices. Shopping in a grocery store, for example, that offers very little options makes us feel uncomfortable. In this regard, we like keeping our options open. Multiple options imply that one of these options perfectly matches any customer’s needs. These different alternatives truly hold different qualities. Examples are different types of brands, flavors, sizes or colors. This is called the variety effect.

    How to Use These Effects

    The answer to what we truly seek, scarcity or variety, lies within. Yes, consumers prefer having multiple, distinctive options. And yes, they also assume that a scarce product is a desirable product. To maximize both effects as shop manager, you should aim to have a set of options and sub-options, without being overstocked. Having three to seven options is ideal for a consumer. This way, there is enough choice to reap the benefits of the variety effect, but not too much choice that the consumer is overwhelmed (i.e., choice overload).

    By removing some of the stock to another location, like another shop or a storage area, you can virtually induce the scarcity effect. Use this to temporarily boost sales on a specific product.

    Take-home points

    • Consumers are driven by a need for scarcity (uniqueness) and variety.
    • By having several alternative options, the variety effect sets in. By (virtually) inducing scarcity, customers are more motivated to buy your products now.
  • How To Manage Your Inventory: Divide and Conquer
  • Reference:

    Cachon, G. P., Gallino, S., & Olivares, M. (2018). Does adding inventory increase sales? evidence of a scarcity effect in us automobile dealerships. Management Science, 65(4), 1469-1485.


    Further Reading

    • A Surprising Way To Minimize Product Returns

      A Surprising Way To Minimize Product Returns

      We live in a returns culture, where delivery is free and so are the returns. Zero shipping fees and favorable in-store return policies make it very attractive to bulk buy products consumers don’t need. When consumers return their purchases, it causes losses for the companies due to extra logistical and repackaging costs. An increasing amount of returns have a negative impact on the environment too.

      Marketers should strive to reduce the returns to save costs and reduce the adverse footprint on the environment. A recently published study has discovered a simple yet highly effective technique companies can use in this regard.

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