Shortages as marketing

Today's Wall Street Journal has an article trying to analyze Why shortages of hot gifts endure as a Christmas ritual. The article quotes some consumers and businesses that believe that these shortages are manufactured.

Still, some consumers remain skeptical. Karen Connolly of Scituate, Mass., tried to place an advance order for the Xbox 360 two Fridays ago on Circuit City Stores Inc.'s Web site. But her order was too late. "Santa can't always get things either," she had to tell her nine-year-old son.

"I think they create these shortages to create publicity," Ms. Connolly says. "From a marketing standpoint, it's brilliant, but from a parent's standpoint, it's annoying."

Apple, for its part, appears to have some control over where consumers can find iPods this year. Over the Thanksgiving weekend, Piper Jaffray Co. analyst Gene Munster checked on availability of iPods at 11 Circuit City, Best Buy Co. and CompUSA Inc. stores and also at 10 Apple-owned retail outlets. Eight of the Apple stores had all iPod models in stock, Mr. Munster said in a report published earlier this week. In sharp contrast, all 11 of the other retailers were out of at least one color or configuration of the iPod nano or the video iPod, which start at $199 and $299, respectively. Mr. Munster's conclusion: Apple is squirreling away iPod inventory for its own stores and Web site.

Apple's Ms. Cotton declined to comment on how Apple allocates inventory with retailers.

Of course, both companies deny any such marketing strategy:

Manufacturers of popular toys and electronics have long been accused of whipping up shopping frenzies by deliberately rationing product supplies. But Apple and Microsoft insist they have done nothing of the kind with the iPod and the Xbox 360.

"We're shipping every one we make, but it's still not meeting demand," says Katie Cotton, an Apple spokeswoman, referring to iPods.

"No one has designed it to be this way," says Molly O'Donnell, a Microsoft spokeswoman, of the Xbox 360 shortages.

Now we do know that the last statement is not entirely true, based upon some of the materials distributed in Norway for Microsoft's XBox 360 launch there. Some of the terms of the agreement require that retailers post "Sold Out" signs on the first day -- and they have allocations that guarantee it as well.

But in today's tough marketing climate, though, marketing success or failure is really a matter of what measurable results you get from the strategy. And we see two indications that perhaps this shortage strategy isn't the best approach:

1. Frustrated prospects often postpone purchases or buy alternatives. Since most consumers can't get XBox 360s in stores, as many as 60% of consumers are postponing purchases and waiting for the Sony Playstation 3.
   



2. Shortages rarely deliver business results. It's hard to book revenue and profits when you don't have products to sell. Despite claims of shortages from Apple, current expectation is that it will sell around 10 million iPods this Christmas, netting it more than $1.8 billion in profit. Apple is clearly incented to make and sell every iPod it can.

So given all that, why is Microsoft content to have XBox 360 shortages? Simple economics, my dear Watson. Since the company loses as much as $156 on each console it sells, the fewer it sells, the less money it loses. Shortages actually deliver better business results and buzz at the same time for Microsoft, and given that production quantities are limited anyway, I think Microsoft just decided to go with it. As the article notes one marketing professor argues that these shortages are just psychological tactics.

"For the Xbox, it would have been terrible to have that thing in stock. It would have been a marketing disaster," says Peter Sealey, an adjunct professor at the Haas School of Business, at the University of California, Berkeley, and a former Coca-Cola Co. marketing executive. Consumers expect to have to fight for hot products, he adds. "Shortages create a whole mystique of desirability."

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