February 23, 2008

Bring on the Packrats! How to Stimulate a Hoarding Frenzy

by Freddy J. Nager, Founder of Atomic Tango LLC + Not a Hoarder

It’s only a penny, but it’s compelling millions of consumers to rush out and stock up before it’s too late…

Yes, we’re talkin’ postage stamps here, which have plummeted in popularity since the advent of email. And yet, with a one-cent postage increase coming May 12, consumers are snapping up “forever” stamps that will cover the cost of mailing a letter eternally.

According to the L.A. Times (2/11/8), over 5 billion “forever” stamps have been sold with “an additional 5 billion in stock to meet the expected demand before the May price change.” In cash flow terms, that means the Postal Service has already raked in $205 million from the “forever” stamp, with another $205 million anticipated over the next three months.

In addition, we all know that many of those stamps are going to find their way to the backs of desk drawers before teleporting to that mysterious land where things like socks, USB flash drives and campaign promises disappear. So most of it is just extra cash for the Postal Service. Hopefully, someone over there knows how to invest — but that’s a topic for someone else’s blog. I do marketing, and I see the “forever” stamp and the announcements of future price increases as a brilliant combo.

(I bet you never imagined you’d ever see “brilliant” and “Postal Service” in the same article.)

Now, hoarding is nothing new. It dates back to ancient times when villagers stocked up on frankincense and myrrh after three wise guys perpetrated some inspired celebrity placement. More recently, hoarding led to the real estate bubble when consumers believed there was a limited simply of property in places like Miami and Vegas. (Talk about putting the “con” in “condo.”) And in the ’90s, there was some kind of bizarre mass fetish with Beanie Babies that scientists are still trying to explain.

The question is, how can you stimulate a hoarding frenzy to benefit your own business?

1. Pick a unique product that already has demand and limited supply:
Obviously, collectibles such as artwork and fine wines fall into this category, but so do certain favorite mass-market brands. When Nike releases a limited-edition shoe, teens swarm their local FootLocker to claim their pair. But caveat emptor: most electronics are not hoardable, since consumers know that their prices will decrease. While Nintendo managed to achieve hoard-worthy status for its Wii, Apple fanatics who tried to hoard the iPhone got iScrewed.

2. Make sure that product is easy to hoard: Everyone knows gas prices will increase, but few people have the facilities to stash gas. Perishables also are not a good candidate, for obvious reasons. Since paper is easy to hoard, what you can do is sell options that enable consumers to buy future products at the current price. What if you could buy “forever” coupons for gasoline now at $3/gallon (while supplies last)? Or “forever” tuition credits at a state college at current levels? Or a “forever” airline ticket from L.A. to New York based on 2008 prices?

3. Make sure cornering that market is legal: The diamond company DeBeers got nailed for their marketing practices (apparently, diamonds are not that rare an item). On a smaller scale, it’s illegal to hoard water or fuel and then profit it on it during a natural disaster (that’s illicit price gouging). So I recommend that you stimulate hoarding only for a product that you uniquely produce, and that isn’t something that lives depend on (you got that, pharmaceutical companies?).

4. Announce price increases ahead of time: For some items, like gas, people know the price will go up. For others, you need to follow the Postal Service’s example and announce exactly when the price will go up and by exactly how much. Most businesses are reluctant to announce any kind of price increase, but for certain products, it might make sense — and dollars. For example, if Trader Joe’s were to announce that they were increasing the price of my favorite coffee brand by 25% tomorrow, I would go there right now and buy a case to last me at least a week. (Yes, I drink about that much.) Note to Trader Joe’s: please ignore this blog and forget everything you just read.

5. Pick your price increase strategically: If it’s too low, people won’t care — and the financially savvy ones will determine whether it’s better to invest in bulk purchasing, or to keep their money in a savings account. If it’s too high, you could discourage your customers from making purchases after the increase goes into effect. The best option is to base the increase on certain external factors that consumers can’t blame on you — the price of oil, inflation or supply shortages — and then keep it within reason.

6. Decide if you’ll allow arbitrage:
Arbitrage is the practice of buying something and selling it for a higher price at a different time or place. For example, someone buying tons of stamps at 41 cents then selling them for 41.5 cents after May 12. (What some people will do for an extra half a penny…) If you don’t want to see your “forever” product wind up on eBay, you could limit its purchases per person (which doesn’t usually work, and goes against your hoarding stimulation strategy in the first place), or you could require that only the purchaser is allowed to use it. This, of course, reduces its desirability. So why not let arbitrage happen? After all, it’s the stories of Nintendo Wii units selling for $500 that help fuel the demand.

Some marketers might say what I’m recommending is unethical, but if your business has to increase prices anyway, isn’t it more ethical to give consumers fair warning and to allow them to stock up? The only thing that would be unethical — and probably illegal — would be to promise a price increase and not follow through. If such duplicity is your game, then stick to real estate or the stock market where that’s just business as usual.

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

One Response

  1. Great post; I found you when checking out your piece on Monica Rockle and stuck around when I saw some of your other posts. After reading this article, it occurs to me that iTunes Music Store missed a great opportunity to encourage hoarding in advance of it starting to sell non-DRM protectied files…..or, perhaps it was being nice to consumers? Wow, that’s terrific when one can’t tell corporate ignorance from beneficence.

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