The Two Cornerstones of Massive Business Growth

Imagine signing up for skydiving for the first time in your life. You get to the airport and a salesperson tells you about your options for the day. She explains:

“You have two choices. The bargain package is $99 and includes a parachute that we bought from the parachute outlet store. Usually they work fine. Or for $599 you get the deluxe package which includes a top-of-the-line parachute guaranteed to deploy.”

Which package would you buy?

Now consider this scenario: your child is a huge Taylor Swift fan and Taylor is holding a benefit concert (and let’s assume this is in a post-COVID world). Tickets are $500 each and Taylor has no plans to go back on tour for a few years. You’ve never paid more than $100 to go any live event and yet suddenly you are seriously thinking of shelling out a grand for two tickets.

These stories exemplify the two reasons that people buy anything: value and scarcity. And while these examples describe consumer behavior, these motivations apply equally to business decisions as well.

Every massively successful business combines both of these characteristics. In this article, I’ll suggest ways to achieve this for your business.

Value: The Minimum Threshold

Value simply means that you offer a service or product that has perceived benefit for customers. This can include solutions that increase profit, reduce costs, simplify workflows, save time, provide insight and data, increase customer or employee satisfaction, and so on.

The greater the value, the greater the customer will pay for the product or service. Hence, a software solution that drives $10 million in annual profit to a company is worth more than one that saves the company $10,000 a year.

Note that the determinant of value is not always the literal value but the perceived value. Buyers are not always rational and often do not have a full data set against which to make a completely quantitative decision about a purchase. For example, a company may offer employees free lunch daily, assuming that this perk increases employee satisfaction, but they may not be able to fully determine whether the cost of lunch is truly justified by reduced attrition or increased employee productivity.

Value is not static. Customer needs may change and innovation may disrupt value. Imagine owning a typewriter factory in 1980, only to see the personal computer obliterate your entire industry.

Ask yourself: what value do I provide to customers, how valuable am I, and how could that value be disrupted? Don’t be afraid to ask your customers to help you answer these questions – you may discover that your answers and their answers are different.

Scarcity: The Gateway to Profit

A product or service is scarce if there are few competitors or substitute products. Proprietary processes or technology, access to rare expertise or connections, years of experience, and specialization are all examples of scarcity.

I learned about scarcity first-hand when I started my career in search engine marketing (SEM) in 2000. Back then, there were maybe 500 people who had any SEM expertise. As SEM exploded in popularity, there were quickly more companies that needed SEM help than there were SEM experts. As a result, my annual compensation almost tripled in less than four years.

Creating scarcity is hard, for two reasons. First, building something rare is difficult – if it weren’t, everyone would do it! And second, when others see how valuable your scarce offering is, they will want to replicate it to reap the rewards for themselves.

To some degree, this has happened in SEM. The small cadre of SEM experts that started in 2000 is now a massive industry with hundreds of thousands of professionals. Individuals and agencies – seeing how much companies were willing to pay for SEM help – devoted themselves to becoming SEM pros, wanting a piece of the action. As a result, simply knowing SEM is no longer scarce today – to be scare in SEM, you need to have proprietary processes, software, or specific experience that is not easily replicated.

As a result – like value – scarcity is not static. When Microsoft launched Windows in the 1990s, it was an incredible advancement in computer usability. Today, that original Windows software has been surpassed and improved many times over and is worth nothing.

What is scarce about your business? What innovation could make your business less scarce in the future and how can you invest today to maintain scarcity moving forward?

Value + Scarcity Drive Business Profitability and Growth

Something that is scarce and not valuable is worthless. Something that is valuable and not scarce is a commodity. Massively successful businesses offer solutions that are both scarce and valuable. Plotted on a graph, it looks like this:

Think of any great company that has grown tremendously and you’ll find a combination of value and scarcity. For example:

• Google: Incredibly useful tools and effective advertising (value); Proprietary algorithms to organize information (scarcity);
• Amazon: Fast shipping, massive selection of products (value); Proprietary logistics and delivery (scarcity);
• Facebook: Free tools to connect people (value); Scaled community of billions (scarcity).

To be clear, large companies can be built on commodity solutions. Take Proctor & Gamble (P&G), for example, which has numerous commodity products (soaps, detergents) that each do more than one billion dollars a year of sales. P&G has grown a large business by investing heavily in branding their products, which allows them to charge more than competitors who have identical products (perceived value).

I’d argue however that commodity businesses are always a race to the bottom. P&G has been successful for many years by securing premium shelf space in grocery stores and out-spending competitors on brand marketing. The nature of capitalism is that competitors want some of your profit. It is far easier to attack a profitable commodity than a scarce offering. And commodities are especially vulnerable when competitors with a scarcity advantage attack them.

In P&G’s case, you need only do a few searches on Amazon to see that Amazon is launching products that directly compete with P&G, and promoting them in their search results (see “Presto” below):

While P&G can still buy virtual shelf space by paying for prominent position via advertising, it is only a matter of time that Amazon offers identical products to compete against every P&G brand. And perhaps someday Amazon will offer expedited shipping and deep discounts for purchases of Amazon brand products, thereby increasing the value of their commodity products vis-à-vis P&G..

Put another way, a commodity business (value but no scarcity) is certainly better than a business with neither value nor scarcity, but it is always ripe for disruption.

Montgomery Ward and You

Montgomery Ward was a department store founded in 1872. By World War II, the company had more than 12,000 workers. To put the dominance of Montgomery Ward into context, when it’s workers went on strike in 1944, President Roosevelt sent in the US Army to break up the strike, as he was concerned that a Montgomery Ward strike could disrupt the delivery of goods during wartime. About 50 years later, Montgomery Ward filed for bankruptcy.

In it’s heyday, Montgomery Ward was as innovative as modern commerce giants like Amazon. The company invented mail order catalogs, modern supply chains and even wrote the song “Rudolph, The Red-Nosed Reindeer” as part of a promotional campaign!

After World War II, a combination of bad management decisions, competitor innovation, and a lack of investment quickly destroyed all of Montgomery Ward’s advantages and differentiations. And now the brand is nothing more than an historical footnote.

Businesses often judge their own success by revenue and profit growth. This makes sense since those are the main objectives of any business. But financial data is only an indication of the historical health of a business rather than the future health. Financial data tells the story of continued growth in profits until it doesn’t. And businesses that don’t act until they see the numbers going in reverse usually have acted too late. After years of retail dominance, Montgomery Ward no doubt never imagined their growth and profit would subside, until it did!

Put another way, great businesses continually ask “am I valuable, am I scarce, and what do I need to do to preserve scarcity and value into the future?” as much or more than they ask “did I grow revenue and profit over the last year?” Answer this first set of questions and you will likely be pleased with your financial answers, now and long into the future.