Why scarcity and brand can beat volume

1 The bottom line

Limit supply and guard the brand when buyers pay for what the name means, not for what the product does. Volume that cheapens the name destroys the premium, and the premium is where the profit is.

2 Key takeaways

• Do not chase volume that weakens the name. Once buyers see the brand as common, they stop paying extra for it.
  • Fiat lifted Ferrari output from 2,200 cars in 1982 to 4,500, unsold cars piled up, and Luca di Montezemolo cut it to 2,300 by 1993 Ferrari1:40:00.
• Let scarcity come from how you make things, not from a marketing trick. Real limits are believable and hard to copy.
  • Hermès artisans need two or more years of training, so output grows only about 7% a year Hermès53:00.
  • Ferrari builds each car only after the customer orders it Ferrari2:06:40.
• Build one name, put it on everything, and protect it. A known name lets you set terms with retailers and buyers.
  • Wilsdorf dropped more than a dozen brand names and price tiers to build Rolex alone Rolex23:42.
  • Morita refused an order worth several times Sony's capital because it required Bulova's name on the radios Sony49:35.
• Price for desirability, not for the most you could charge this year. Steady, high prices and waiting lists keep the brand worth wanting.
  • Hermès sells Birkins and Kellys below what buyers would pay and raises prices only about 7% a year Hermès1:58:20.
• Choose profit over share. Size that raises costs or cheapens the product pays nothing.
  • Kelleher argued that 4% of the market with profits beats 90% with losses Southwest Airlines27:05.
  • Ferrari's average gross margin is 50%, against 7% for Ford Ferrari3:03:20.

It is our policy to charge a premium for our products.

Akio Morita, Sony

2.1 Refuse volume that cheapens the name

When extra sales would make the brand ordinary, turning them down earns more over time.

• Do not apply a mass-market playbook to a luxury brand. See Ferrari1:47:40.
  • Fiat raised volume, cut cost and shared parts with Fiat cars, so Ferrari road cars stopped matching the racing cars Ferrari1:47:40.
  • Output went from 4,500 in 1991 to 2,300 in 1993, and Ferrari did not pass 4,500 again until 2006 Ferrari1:40:00.
  • The Testarossa ran 7,000 units in seven years while Lamborghini built 2,000 Countaches in 16, and demand evaporated Ferrari1:47:40.
  • Cars went unsold for the first time and workers were furloughed in 1991 Ferrari1:47:40.
• Cap even the product the market begs for. See Ferrari2:50:00.
  • Ferrari capped its Purosangue SUV at 20% of volume, about 2,500 to 3,000 cars a year, giving up short-term profit so that seeing a Ferrari stays a rare event Ferrari2:50:00.
  • Lamborghini now sells over 60% SUVs, and 60% of Porsches sold are SUVs Ferrari2:50:00.
• Ask whether a business model forces you to flood the market. See Disney3:26:44.
  • A streaming service must keep feeding subscribers fresh content or they churn, which is the opposite of Disney's rare, great films Disney3:26:44.
  • Marvel's output rose after Endgame, and later films and shows underperformed Disney3:26:44.
• Pass on growth that raises costs for little gain. See Southwest Airlines27:05.
  • Southwest skipped revenue opportunities that would disproportionately raise its costs Southwest Airlines27:05.
  • Some carriers raised costs 25% to gain another 5% of share, and Southwest was profitable 47 straight years Southwest Airlines27:05.

2.2 Build scarcity into how you make things

Scarcity lasts when it comes from craft, process or rhythm, not from a decision to hold back.

• Let real production limits cap supply. See Hermès53:00.
  • A Kelly or Birkin takes about 20 to 25 hours by one person, and a workshop holds only 250 to 300 people, so growth is about 7% a year Hermès53:00.
  • The hosts say scarcity is "the result" of the craft, not the goal Hermès53:00.
  • About 120,000 Birkin and Kelly bags a year bring roughly 25 to 30% of revenue, with waitlists and resale above retail Hermès53:00.
• Build to order in one place with nothing shared. See Ferrari2:06:40.
  • Ferrari casts engines on one site in Maranello and refuses to share a platform with any other car, unlike Lamborghini's Urus Ferrari2:06:40.
  • The manual process is inefficient, but any car can be built on any line, so about four new models a year need no tooling investment Ferrari2:06:40.
• Make the next chance to buy uncertain. See Zara31:50.
  • Zara renews its clothes every week, and twice weekly in Europe, so an item tried on seven days ago probably will not be there Zara31:50.
  • Customers learn to buy immediately instead of waiting for a discount Zara31:50.
  • The cycle from idea to hanger is 15 days Zara31:50.
• Space out releases so each one feels fresh. See Disney2:24:09.
  • Disney re-released Snow White in 1944 after seven years off the market, when a new generation of children had grown into the audience Disney2:24:09.
  • The re-release brought in $3 million on a few hundred thousand dollars of cost, and the seven-year gap became Disney's cadence, down to the gaps between Frozen films Disney2:24:09.

2.3 Own one name and make it known

A brand that customers ask for by name gives you power over retailers, rivals and price.

• Put your own name on the product, even when a bigger partner offers more money. See Sony49:35.
  • A distributor told Walt Disney that the public knew Lifesavers but not Walt Disney or his mouse, so Walt put his name on every Mickey short Disney53:04.
  • Wilsdorf fought to wholesale watches under the Rolex name, rising from one in six to five in six, so customers would ask retailers for a Rolex Rolex31:11.
  • Morita told Bulova's buyer that Sony would be as famous in 50 years Sony49:35.
  • When Pat Powers poached Ub Iwerks in 1930, audiences still wanted Walt Disney cartoons Disney53:04.
• Pick one brand and one tier, and drop the rest. See Rolex25:45.
  • Wilsdorf first sold under many names at every price level, which cannibalized his own sales, and in 1908 chose a single brand to invest in Rolex25:45.
  • He set rules for the name: short, easy to say in every language, and easy to remember Rolex25:58.
  • He tried Rollo, Hoffex and Winex, and even Rolex Marconi for a cheaper line, before settling on Rolex Rolex25:45.
• Use the law and the design of the product to make the name yours alone. See Coca-Cola55:00.
  • Coke used the 1905 Federal Trademark Act against copycat colas, and the Court held that Coca-Cola means a single thing from a single source Coca-Cola55:00.
  • In 1915 Coke asked for a bottle recognizable by feel or when broken on the ground Coca-Cola59:01.
  • About 7,000 copycat brands were shut down by the mid-1920s Coca-Cola55:00.
  • A 1949 study showed less than 1% of Americans could not identify a Coke bottle by shape alone Coca-Cola59:01.
• Let the name signal something only you offer. See Trader Joe's1:45:40.
  • Joe Coulombe ruled that a private label product must differ in the item, the packaging, the price or the merchandising, never a cheap copy Trader Joe's1:45:40.
  • The promise is delight in what the merchant picked, not that any item is always in stock, which frees the store from stocking everything Trader Joe's1:09:30.
  • Trader Joe's and Costco each stock about 4,000 items, versus about 50,000 at a typical supermarket Trader Joe's2:57:00.
  • Over 80% of the store is Trader Joe's brand Trader Joe's1:45:40.

2.4 Price for desirability and own the channel

A strong brand lets you charge a premium, but only if you control the price and where the product is sold.

• Aim at buyers who can pay for quality. See Sony40:00.
  • Morita reasoned that high-quality, expensive products need an affluent buyer, which meant selling abroad, and set a policy of a premium plus fanatical quality Sony40:00.
  • At first Japan was known for cheap copies, and Sony printed "Made in Japan" very small Sony40:00.
• Price a little below what the market would pay. See Hermès1:58:20.
  • The hosts see underpricing as an investment in desirability, not lost revenue, and resale above retail reassures buyers Hermès1:58:20.
  • Revenue grew about 15% a year since 2013, with about 7% from volume and 7 to 8% from price Hermès1:58:20.
  • A Birkin launched near $2,000 in 1984 and is roughly twice that in inflation-adjusted terms today Hermès1:58:20.
• Let a few scarce top models carry the profit. See Ferrari3:03:20.
  • The F80 sells about 799 units at roughly $4 million, around 15% of annual revenue from one model in its first year Ferrari3:03:20.
  • Ferrari added the Icona series to smooth years without a supercar Ferrari3:03:20.
  • Gross margins on the F80 are estimated at 80 to 90%, against Porsche at 15 to 25% across its range Ferrari3:03:20.
• Own your distribution and cut licensing that spreads the name thin. See LVMH29:25.
  • Arnault found Dior with 260 licenses worldwide and too few boutiques, and chose exclusive shops as Chanel and Hermès did LVMH29:25.
  • Henri Racamier made Vuitton in France and sold through company-owned shops, while competitors outsourced production to cheap regions LVMH44:45.
  • Vuitton had only two company-owned shops in 1978, and about eight years later made around 200 million a year in profit LVMH44:45.
  • Arnault said a network of shops is not built overnight LVMH29:25.

2.5 Spend to feed the myth, not to push volume

The brand is built by proof, presence and story, and it needs steady investment even when sales are slow.

• Keep advertising to the public year after year, including in a downturn. See Rolex27:00.
  • Wilsdorf launched the Rolex trademark in 1908 with an intensive campaign, spending more than 12,000 British pounds a year for several years running Rolex27:00.
  • When Omega and Tag Heuer cut marketing in 2008, Rolex pushed harder, and 2008 to 2010 lifted it to its current level in the United States Rolex28:45.
  • Izzy Sharp noted advertising growth slowed by an average of 27% at the start of the last three recessions, and the companies that did not cut captured the most share Rolex28:45.
• Get independent proof and tie the brand to the best achievers. See Rolex32:16.
  • A small Rolex won the first Class A certificate ever given to a wristwatch, at Kew Observatory on July 15th 1914 Rolex32:16.
  • Wilsdorf bought the Daily Mail front page on November 27th 1927 to announce the waterproof Oyster after a Channel swimmer's watch kept perfect time Rolex38:36.
  • He gave watches to record breakers such as Malcolm Campbell, and later ads tied Rolex to Churchill, Eisenhower and Chuck Yeager Rolex41:02.
• Keep winning in the arena that gives the brand its story. See Ferrari1:36:40.
  • Luca argued there is no direct link between race wins and cars sold, but years without wins mean you stop adding wood to the fire of the myth Ferrari1:36:40.
  • He rebuilt the team with Jean Todt, Ross Brawn and Michael Schumacher after a drought since 1979 Ferrari1:36:40.
  • Ferrari won five straight championships from 2000 to 2004 and took 19 titles under Luca, more than under Enzo Ferrari1:36:40.
  • Enzo had also made himself a reclusive artist who barely cared whether you bought, which wealthy Americans loved Ferrari25:00.
• Spend on places and moments, not on ads that push product. See Zara32:40.
  • Zara spends under 1% of revenue on advertising and puts the money into expensive prime locations, where the store works as a demo Zara32:40.
  • Hermès has no marketing department and spends 4.5% of revenue on communication, two-thirds of it on events, and refuses celebrity endorsements Hermès3:23:20.
  • Sales and marketing together are 23% of revenue at Hermès versus 33% at LVMH Hermès3:23:20.

2.6 Where they differ

Scarcity is not one rule. It depends on what the buyer is paying for and what you want the brand to stand for.

• Nike gives up the scarcity premium on purpose. See Nike2:59:51.
  • Limited editions sold at $150 to $300 resell for thousands, yet Nike neither raises prices nor runs the resale market, because it wants the swoosh everywhere and taste makers on the street Nike2:59:51.
  • The secondary market is estimated at $2 to $6 billion, and Nike's gross margin of about 44% sits below Adidas's 46% Nike2:59:51.
  • Nike spends about $4 billion a year on demand creation, because a televised swoosh builds the brand that sells the shoes people can buy Nike1:54:54.
• Rolex advertises heavily while Hermès barely does. Both protect a luxury name, by different routes.
  • Rolex has spent on public advertising since 1908 Rolex27:00, while Hermès relies on events and word of mouth Hermès3:23:20.
• Even careful brands disagree on where the line sits. See Hermès2:55:00.
  • The hosts split on whether the $540 machine-made Apple Watch band is a profanity or a way to reach new customers, as perfume, airport stores and e-commerce did Hermès2:55:00.
  • 70% of online buyers are new to Hermès Hermès2:55:00.
  • The hosts read the destroyed $150 beach bag, which sold too well in Japan, as a sign of brand lapses, not discipline Hermès2:15:00.
• Raising prices can fund a turnaround when access had been the habit, not the brand. See Disney20:52.
  • Disney's park prices had barely moved since Walt died, with parking still a dollar, and Eisner and Wells raised ticket and parking prices, with the extra money going straight to profit Disney20:52.