#2 Don’t ignore Supply and Demand
OK, this one really isn’t my law. But it’s one that is all too often overlooked in the real world. We often hear buzzwords based on it, like “Supply-side Economics”, or “Advertising boosts Demand”.
What does it really mean?
In a truly free-market economy, there are three elements that are inseparably connected, and those are supply, demand, and price. Let’s start by looking at each of these individually:
Supply is simply defined as how much of something is available on the market. Are there a lot of people or businesses trying to sell a product? That’s defined as the supply. That can be measured on lots of different levels. There are lots of competing toothpastes, but there’s only one Crest. When I started my first internet business, based on my wife’s rubber stamping hobby, we saw that there were a lot of other stamp companies. The supply of stamps was high. But there was only one company making stamps with our designs. So, within that market, the supply of OUR stamps was low.
Demand is very simply all about how many people want what you’ve got. If you’ve got a lot of people clamoring for what you’re selling, that’s a good thing. There are a lot of things that everyone needs. Food, clothing, shelter, etc… These things would be high demand items. So why aren’t they more expensive? You’d think that something everyone needs would be pricier, right?
Well, see the third item in that list, “Price”, is a function of the other two, “Supply”, and “Demand”. They are interrelated. Let’s look at a few theoretical examples.
If demand is high (Lots of people want it), and supply is low (it’s hard to find), then the price of that item is going to be high. Diamonds are a great example. Collectibles can also be in this category. Do you want a Mickey Mantle rookie card? Not very many of them around, and a lot of people want it. So, you’ll pay for it.
If the supply of something is high (lots of people selling it), and the demand is low (not a lot of people looking for it), the price is going to be low. This is the proverbial “selling coals to Newcastle”, or “selling snow to the Eskimos”. Look into the current market for leather jackets on eBay for another good example of high supply, low demand.
If the supply and demand are essentially equal, then the price settles into a place where it’s comfortable. Sure, we always complain about paying money, but it will eventually settle into a place where it’s all in balance. Buying gasoline is very much like this. Availability of lots of competing gas stations provides a good supply. Lots of people driving cars keeps demand high. As prices go up, people tend to drive less. As prices go down, people drive more. Supply and demand are in balance, fluctuating but also stable, and that keeps the prices pretty much in the same place.
Specialty shops thrive on products that are low in supply (hard to find), and low in demand (off-beat and unique items).
Sometimes, these things can be manipulated artificially, either intentionally, or in ignorance. There are consequences. For example, remember the gas lines of the 70’s? That was because the government froze the prices on gasoline, artificially holding the prices down. The demand stayed high, and so the supply dried up. People were waiting for hours in line to buy a few gallons of gas.
My sister hand knits sweaters from hand-spun exotic wools. It’s a very labor- and time-intensive process. She doesn’t like to sell them, because she’s afraid that she’d get swamped in orders, and wouldn’t be able to keep up. My response? “If you can’t keep up, you’re not charging enough!” Think of it. It’s the same as the gas lines. The price is accidentally deflated, and so the supply sinks into scarcity.
What if you artificially tinker with the demand? What about a company who miss-guesses how many products they’ll need and overproduces. Suddenly they’re overstocked, and they have to let the products go at lower prices just to clear them out.
Then there’s the lesson of the “Tickle-Me Elmo”. This was a toy put up for sale, and the company that made it grossly underestimated the demand. The supply ran out quickly, and suddenly the doll started appearing on eBay and on websites for hundreds of dollars more than the original price. And people were willing to pay it. Because the demand for the product was there. So, what’s the problem? Well, do you think the manufacturer was able to take advantage of the higher prices? Nope. That was all aftermarket reselling. Other people were making all that money.
How does this effect you?
Understand it, and learn how it works. That will help you more than anything else to determine just how viable a particular product line is. EBay is a particularly clear laboratory to study the law of supply and demand. The better you know it, the more you can make it work for you in your pricing.
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