In an earlier post I described how critical it is that an entrepreneur capture much if not most of the value that you create (versus your customers realizing the value because you lack pricing power).There is nothing more important to an emerging growth company than its value proposition; the reason why customers buy your good or service - versus buying another product category or another product like yours from a competitor.
You Need Scarcity
But a strong value proposition isn’t everything. You also need pricing power, which is all about scarcity.
An example of scarcity: It’s 8:45 PM on Monday night, September 21, 1970, and you live in a suburb of Cleveland, Ohio. Your beloved Browns are playing the New York Jets in the first ever game of ABC’s Monday Night Football (MNF). You watched the single college game permitted by the NCAA to be telecast by one network in your region on Saturday, and you watched the one NFL game broadcast by one of the three networks on Sunday. But you want more football.
Flash forward to Monday night, September 17, 2012. You’ve spent the entire weekend glued to the tube, totally immersed in football. Beginning at noon Saturday you’ve watched a multitude of college and pro games. You had a choice of 66 college games from which to choose on who knows how many networks and channels. Because you purchased DIRECTV’s NFL Sunday Ticket, which allows you access to every “out of market” game, you had the opportunity to watch every NFL game that was played on Sunday. You are football saturated.
Many credit the success of MNF to the creative genius of Roone Arledge, the President of ABC sports, who brought us a “pulsating show, combining outspoken journalism with abundant dashes of entertainment…..[he created] a visual and technical tour de force…..[by employing] nine cameras including one sideline and two hand-held cameras…..[and giving us] the broadcast team of Howard Cosell, Frank Gifford, and Don Meredith. As talented as Arledge was, he is not the reason for MNF’s success; scarcity is. Consider the chart below:
MNF’s TV ratings have declined by half over the 43 years it has been on the air, as more and more football viewing became available to us. Let me give you another example before drawing a conclusion.
The Price of Alcohol
You’ve just switched on the radio, and someone is saying:
“The reign of tears is over. The slums will soon be a memory. We will turn our prisons into factories and our jails into storehouses and corncribs. Men will walk upright now, women will smile and children will laugh. Hell will be forever for rent.”
It’s January 17, 1920, and the 18th Amendment to the Constitution of the United States has been ratified. The evangelist Billy Sunday is proclaiming the benefits of life without alcohol. He’s been a strong supporter of the prohibition of alcohol, and his preaching almost certainly played a significant role in the adoption of the 18th Amendment. Just how accurate was his prediction. Behold the following chart:
During Prohibition the homicide rate increased by over 40% from just under seven homicides to almost 10 homicides per 100,000 people. Prohibition led to worse social conditions than were experienced prior to Prohibition as demonstrated by more lethal forms of alcohol, increased crime rates, and the establishment of a black market dominated by criminal organizations. Ironically, alcohol consumption rose to record levels during prohibition, and the price of alcohol skyrocketed. There is a lesson to be learned here, and it has nothing to do with morality. Take a hard look at the final chart:
The chart contains what I call the Value Matrix©. It’s a two by two matrix where need is on the X axis and scarcity is on the Y axis. A product or service that has high need and high scarcity is placed in the upper left quadrant, whereas a product or service with low need and low scarcity is placed in the lower right quadrant. With a stroke of the pen we moved alcohol from the lower right quadrant to the upper left quadrant, and, over time, we moved MNF from the upper left quadrant to the lower right quadrant. In the former instance, we made alcohol radically scarce, and in the latter instance our insatiable appetite for football made it abundant. Whatever your products or services are, their ideal residency is the upper left quadrant; we’ll discuss why in a subsequent post.
