Scarcity Principle At Work In The Watch Industry: Driving Demand, Sales And Exclusivity

In market economics, equilibrium is reached when supply matches demand. However, real-world markets often experience disequilibrium, with supply and demand misalignments. A surplus arises when the supply exceeds demand, leading to driving down of the prices. Conversely, market scarcity ensues when demand outstrips supply, causing prices to rise.

The latter phenomenon, known as ‘Scarcity Principle’ is a theory which suggests that as a commodity becomes scarcer, its price should increase until supply and demand balance. However, this price increase can limit access to the product, making it available only to those with sufficient purchasing power. When a product is scarce, consumers must weigh its value against cost. As consumers, we understand that scarce products tend to be hefty on the dollar. We also very much understand the potential satisfaction of acquiring the same. Here, the social psychology of scarcity principle takes charge and we become guilty of succumbing to the fact that as consumers, we credit higher value to goods that are scarce than to goods in abundance.

Quoting Robert B. Cialdini from his study titled, ‘Harnessing the Science of Persuasion’ published in Harvard Business Review magazine, “People want more of what they can have less of. Study after study shows that items and opportunities are seen to be more valuable as they become less available.”

Nowhere is the strength of scarcity more evident than in the luxury goods industry, particularly the luxury watch industry. Here, the scarcity principle is a dominant leverage to generate significant product interest and consequently drive unit prices as well as sales.

Actual scarcity vs the illusion of scarcity.

Driving appreciation in watch prices, the term rare has become a ubiquitous descriptor in the world of watch advertising, particularly in the auction space. Visit any auction site or buy an auction catalog, nearly every listing description features the adjective “rare,” often with intensifier affixes like “ultra.” In the retail space, it’s a more impactful phenomenon. Luxury watch brands such as Rolex, Patek Philippe and Audemars Piguet have successfully implemented strategies to create exclusivity around their products. Through marketing and production, they maintain high demand and prices, solidifying their position as coveted commodities.

Each of these three luxury watch manufacturers has significantly increased annual production by factors of tens of thousands of watches. Rolex's 2023 production of 1.24 million timepieces and sales of $11.5 billion, as reported in the Morgan Stanley's annual watch report for 2023, are undeniably impressive. This marks an increase in production output by more than 10%. However, the brand is poised to further increase production with the opening of a new manufacturing facility in Bulle, later this decade. Audemars Piguet’s 2023 production figures too incremented by 6000 units as they produced 51,000 watches as compared to 45,000 of the preceding year. Patek Philippe too posted an impressive number with a personal best for the Manufacture at 70,000 units sold. Despite the ramped-up production incentives, the demand however, continues to outstrip supply, suggesting that this trend will persist for the foreseeable future. While some of this is restricted by the genuine production constraints, some suspect that it’s part of a questionable ploy.

Calibrating the production numbers in a way that achieves substantial annual targets and yet maintains a supply scarcity is a deliberate strategy for some brands. Even with a restricted total production volume, brands like Rolex realized an implied retail market share of 30% of the total Swiss watch market in 2023, attained at an 11% increase in brand revenue as compared to the previous year. The idea of “manufactured scarcity” is well-touted in the watch world and many attribute waitlists, relationship building, controlled distribution and limited editions as tactics to craft a deception of illusion, only to inflate value and demand.

In response to an article published on Yahoo Finance, headlined “Why the Rolex watch shortage is a ‘perfect storm’”, Rolex addressed product shortages while dispelling conspiracy theories. Here’re the excerpts from Rolex’s response:

“The scarcity of our products is not a strategy on our part. Our current production cannot meet the existing demand in an exhaustive way, at least not without reducing the quality of our watches - something we refuse to do as the quality of our products must never be compromised.”

“All Rolex watches are developed and produced in-house at our four sites in Switzerland. They are assembled by hand, with extreme care, to meet the brand's unique and high-quality standards of quality, performance and aesthetics. Understandably, this naturally restricts our production capacities - which we continue to increase as much as possible and always according to our quality criteria.”

Laws of supply and demand applied to the watch industry.

Jack Forster once raised a query, “Are there too few Rolex or too many millionaires”? On the frontiers discussing supply and demand, that’s genuine to ask. This insatiable shortage of watches, particularly of the steel sports segment, originally turbocharged by the pandemic, has yet to cease. There’s no evil in brands capitalizing on the scarcity principle to shift the scales in their favor. However, this risky leverage has incremented the critical volumes and actually hurt the wishful buyers in that regard. With retail availability restricted to percentages that often lie in the sub 1% category, the situation isn’t confined to Rolex only. Audemars Piguet and Patek Philippe too command the demand and pricing reigns. For interested buyers, this is often frustrating. Having the dollars to spend, yet facing rejection from the salesperson is a definite dent on esteem. Overplaying the scarcity card hence can be counterproductive, leading to consumer frustration and potential erosion of brand loyalty over time, with Rolex being an absolute exception here Hence, pre-owned fills the space, catering the high demand and actually delighting buyers even when listed above RRP. Hence proved, self-esteem is priceless!

Outsmarting the market for value gains.

Prices in the watch space are always a difficult discussion to have. At the same time when we are engrossed with rare watches, their prices can be intimidating. They can even be the end game for a lot of aspirations and dreams. When prices get to a certain point, we just can't save, rationalize or prioritize enough anymore to make that goal. So, the thing to do is to look forward and see if you can get ahead of the market and buy a watch before it goes nuts. Well, dealing in any horses that are already out of the barn is impossible, but you can gather insights for what you think is going to be highly sought in the near future. Hunt those sleepers now! This is not because you want to become rich or speculate and resell the watch, it's merely to avoid getting priced out of the market. Until brands become more generous, this is the only antithesis that’s going to work in your favor, period.