When Shortage Is Strategic
Elon Musk has been in the news a lot lately. While his successful Falcon Heavy launch probably matters a bit more to the future of his companies, I want to focus on his flamethrower.
It shouldn’t be surprising that at a price point of $500, his latest installment in grandiose toys sold all 20,000 units quickly. That’s revenue of $10 million.
The Boring Company was created around the idea of underground transportation tunnels to whisk people between cities. Money made off of Musk’s flamethrower-that-isn’t-a-flamethrower is going toward his traffic relief objective.
This isn’t the first time that The Boring Company has had a wildly successful stunt product like this. In December, the company sold Boring Hats. Limited to 50,000 units, the hat easily sold out. That meant $1 million of revenue for, well, boring hats.
Musk has proved himself a savvy businessman. Why then does he allow his Boring products to sell out?
Economics 101 teaches us that a market is in equilibrium when supply equals demand. Price will be a function of quantity supplied and demanded. If price is set below the equilibrium price, we have excess demand.
Clearly, money is being left on the table. Is Musk plain ignorant?
On the contrary, he understands that strategy drives market pricing, not the other way around.
Pricing below equilibrium may not be economically efficient, but it can be a strategic choice to achieve a certain goal. Economically speaking, a musician or performance venue should price their tickets high enough so that they rarely sell out. Obviously, most don’t do this.
Performers are happy to have a show sell out. Extra profits, then, go to the resale market and are captured by a third party. This is happening already with Boring flamethrowers, which are being listed for thousands of dollars on eBay.
Pricing, however, affects and is effected in turn by larger strategy. Smart businesspeople I’ve spoken with miss this point. They’re stuck in Economics 101, where price is the output of a simple equation.
Price optimization is a tempting managerial focus because it purports to give a single final answer to your pricing strategy questions. But at best, it is only a component of such strategy.
Shortages can be signals of excitement, quality, even virtue. “Sold out” is a powerful story for the right kind of product. Musk’s goal isn’t optimizing his earnings from flamethrowers. His goal is building excitement and investment around his companies. Selling out a flamethrower, and even a hat, does that in a big way.
Optimization cannot tell you what product to create. It cannot tell you which customers to target. And it cannot answer larger strategic questions of what you want your brand to be, or how to communicate that to the market.
Tagged: eBay, Elon Musk, price optimization, product pricing, shortage