So what does scarcity really mean?

I have been asked this question a few times now. I saw Nat Burgess (Corums President) interviewed on CNBCs Closing Bell the other day. He talked about the 3PAR deal and the principal of scarcity behind the valuation. I understand how this works if I have a $200M business, but as a $10M software business, how do I create a sense of scarcity around my small business? Good question. Theres a long answer to this, however, Ill try for the short one.

 

The principal of scarcity describes a fundamental economic challenge of unlimited demand in the face of limited resources to fulfill the demand.

 

For you, it means finding a way to make your business unique. 3PAR made themselves unique and relevant in a manner that drove a stunning M&A valuation. Its a good example of being one of a kind, relevant and first. The opposite end of the spectrum is to be unique by being the last holdout in a market consolidation. Your business may be unique but not so valuable, mostly because you are late to the party and much less relevant. For most companies, the key is delivering tomorrows technology as the enabler of strong growth for a specific acquirer, before other strong options become available.

 

Leveraging scarcity as you position your $10M technology company means paying attention to a few things.

  1. Build sustainable differentiation by leveraging your unique technology or business model (more on business model later).
  2. Create first mover advantage by placing your company in front of big marketplace changes or by delivering critical technology that works ahead of the competition.
  3. Establishing real credibility in the market by achieving market-leading sales metrics or recruiting bellwether customers to validate your value proposition.

 

So heres how you stay sharp:

  1. Study Your Market understand the major trends and drivers and look for potential game-changing opportunities.
  2. Study the Market Leaders  analyze their strategy, positioning and resource allocation. They make the market for you by leaving gaps, thereby becoming the likely acquirers.
  3. Focus - build your value proposition, strategy and positioning around convergence of these two. Move forward with a laser focus.

 

A great business model example is Mint.com, acquired by Intuit in Sept. 2009, only 2 years to the day after it was launched and, by the way, about $30M in VC funding later. The company offers free online personal financial management services and quickly became popular as more people turned to the Web to create budgets and manage their finances. The company says it had 1.5 million users tracking nearly $50 billion in assets and $200 billion in transactions at the time of Intuits acquisition, but no revenues. They had a completely different business model, good product and relevance to large community of users. Their business model enabled first mover advantage and created unique differentiation, their rapidly expanding subscriber base created credibility and Intuit saw strong growth opportunities. Thats how scarcity works.

Posted by , Senior Vice President on 3 September 2010
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