Artificial Scarcity and My Failed Quest for an NES Classic

Confession time: on November 11, I went to a Target store before it opened and waited outside for the launch of Nintendo’s NES Classic Edition.  I went home empty handed.  Just this morning (December 20), I went to a Best Buy store in 40 degree weather about an hour before it opened only to find out all the tickets for NES Classics had already been handed out to people who had camped outside the store overnight.  I’ve made probably two dozen calls over the past month, stopped by numerous stores, and even attempted to bribe employees for more information about shipments.  I’ve had absolutely no luck.  The simple fact is the NES Classic is by far the most difficult to procure item of this holiday season.

But the whole experience has me thinking: why would a company refuse to meet demand for one of its products, if even temporarily?  Nintendo is a $4.4B company and has been releasing globally-successful video game hardware for 36 years; I can’t believe that the company is this bad at predicting demand that the shortage is an accident.  So is a temporary shortage a strategy and, if so, how could it be beneficial to the company?

Before diving into the strategy for the shortage, let’s talk about the three possible reasons a shortage could occur:

1. The company cannot produce enough to meet demand.  There are very legitimate instances in which this could occur, often due to limitations in natural resources.  A great example of this is the most hard-to-find beer in Atlanta, Tropicália.  Atlanta beer drinkers have grown accustom to the empty grocery store shelf with a Tropicália label under it.  But the beer uses very specific ingredients, like Galaxy hops from Australia, and, as the CEO himself has said, “the brand can only grow as fast as the raw materials will let it.”¹
2. The company will not produce enough to meet demand.  In this instance, the company is fully aware that there is a shortage of its product and still refuses to produce more for a given time.  As a father of a young child, I am intimately familiar with the “Disney Vault,” which is Disney’s term for its storage of a movie that it simply refuses to currently sell (if you don’t believe me, try and buy a copy of The Lion King anywhere right now).  In Disney’s case, the strategy is due to the fact that the movies tend to target young children, which is a demographic that is constantly in flux.  By putting a movie in the “Disney Vault” and then re-releasing it every seven years or so, it can build excitement for a new generation of children that has never been exposed to the movie.
3. The company underestimated demand and has not yet caught up.  As a telecommunications employee, I still remember the original iPhone launch in 2007 and the massive overhaul to mobile networks that occurred as data usage exploded.  Not even Apple had foreseen the complete shift to users primarily accessing the internet through their mobile device, and the mobile networks were congested as the service providers made improvements to meet the additional demand.

Now which one of these applies in the case of Nintendo’s NES Classic?  The President of Nintendo America is on the record as saying “The overall level of demand is certainly greater than we anticipated, that’s why we’re suffering through the shortages out there in the marketplace.”²  Poppycock!  Limiting supply is a classic strategy that Nintendo has been using for decades with its newest products.  So why would Nintendo deliberately produce so few units?  As it turns out, there are many reasons.

The most obvious is the ensuing buzz that is built for the item.  Why buy advertisements for your product when you can make a newsworthy story about the product and thus promote it for free?  When I went to the Best Buy this morning, I spoke with someone else there about the status of the NES Classics, simply assuming he was another consumer.  At the end of our conversation, he said he was with a local news station and was reporting on the story of people camping out to buy the system.  It’s hard to fault Nintendo in this respect, as there is no question that this has been one of the most talked about items of this holiday season.  At least some of that is due to the scarcity.

But there’s more at play here.  After the launch date when it became clear that these units would be difficult to acquire, a secondary market immediately sprang up.  According to eBay, the average sales price was $230 for an item that was selling in stores for $60.³  This raises the obvious question: if consumers were willing to pay $230 for it, why did Nintendo not increase the retail price and enjoy the higher margin?

That answer is somewhat complicated.  Keep in mind that this is in absolutely no way revolutionary technology; in fact, it can be viewed as an item that has already been in existence for 30 years.  Users are willing to pay a relatively low price for the convenience it affords, but might scoff (or even protest) at such a high price for what amounts to a piece of nostalgia.  And remember how Nintendo wants to drive organic marketing for their product through the media?  That message is muddled when everyone is complaining about the price of the product.  Not to mention, it can be seen as price gouging children with a device that is in no way educational.  Nintendo very deftly side-stepped this situation and sacrificed the additional marginal profit to scalpers in order to continue to be seen as a “good” company.

But the fact is that essentially the only units available in the market are at these inflated prices.  This turns the unit into an extremely prestigious, almost luxury item.  Being able to acquire one is either a sign of wealth or a herculean effort.  Either way, owning one is a status symbol and creates a halo effect around all of Nintendo’s products.  Essentially, Nintendo gets all the credit for high prices with none of the downside.  The buzz ensures that Nintendo is on the mind of anyone with a passing interest in video games.

Well, what does Nintendo do with all this mindshare?  Releases “Super Mario Run” on iOS, of course!  Though the success of the game is debatable at this time, it is clear that there was more buzz around the game than otherwise would have been since so many people were already salivating over playing Super Mario games on the NES Classic that they had tried (and, most likely, failed) to acquire.

Nintendo also has to keep in mind its other stakeholder: retail stores.  Nintendo does a small fraction of its sales directly to consumers and instead relies on stores such as GameStop and Best Buy to sell its products.  By releasing units so slowly and in such an inscrutable and seemingly-haphazard manner, Nintendo has driven a ton of foot traffic to these stores.  Consumers are calling and stopping by much more frequently to try and get an inside track on when the next shipment is coming in.  While they are asking, they might make an impulse purchase or two.  I personally called a Toy”R”Us at one point to ask about shipments and received a pre-recorded message saying that they did not know when more shipments were arriving, so I should come in the store frequently to ask for the latest information.  The message was clear: we love you asking about this product, but make sure to do it from within the store where we can cross-sell you for our trouble.

So it’s clear that there are a lot of benefits to an artificial shortage, such as the one Nintendo has created.  But certainly there are negative effects as well, right?  In fact, there are many.

First, there is a definite risk that the brand will suffer more than it benefits.  While this does make Nintendo appear to be a prestigious, luxury company, it also makes Nintendo look like a company that is too incompetent to manufacture a video game system, which is its main business.  There has actually been a lot of vitriol directed at the company on Twitter stemming from the continued refusal to meet demand (only a small fraction of this hatred has come from me).

One must also remember the time-sensitive nature of the holiday season.  This would make a perfect Christmas present, but only if you can get it by Christmas.  At this point, it looks like most people will not be able to.  Nintendo obviously released to coincide with the holiday season, so failing to capitalize on that demand is puzzling.  The most committed consumers will buy this unit whenever they can, but some will not buy it after December 25.  In fact, many people might play the system at a friend’s house and realize that they don’t need a unit for themselves.

And don’t forget about the retail stores.  While they enjoy the increased traffic, there is certainly a lot of employee time being spent on repeating the same message over and over to customers.  When this takes place over the phone (as it often would), there is very little benefit to the store.  If the stores start to feel like this is an unfair expense, Nintendo’s shelf placement at these stores could easily suffer.  Nintendo has already announced its next-generation console, the Nintendo Switch.  If stores are still reeling from this experience, that unit could be buried behind a stack of PlayStations and XBoxes when it is released.

Finally, remember that Nintendo is a publicly traded company.  As the end of the quarter nears, Nintendo risks pushing sales into a future quarter, at best.  By recognizing these sales earlier, Nintendo could invest the revenue from these items and receive a return in the time between when the sale would have occurred and when it actually occurs.  Now everyone knows that the rate of return on short-term savings or treasuries is extremely low, but there still is a time value of money that Nintendo is sacrificing here.

In the end, I personally feel like Nintendo has botched this release and I think that the NES Classic will be a successful failure.  There is no question that the system itself is a success as it has already sold over 200,000 units⁴, but I believe that Nintendo has left revenue on the table with its artificial scarcity strategy.  The strategy only works if a company quickly builds buzz for an item and then meets the demand in a timely fashion.  At this point, the buzz has been built for some time and consumers are just feeling spurned and frustrated at their continued inability to acquire the system.  Perhaps there truly was a miscalculation in demand projections, but I don’t think it fully explains the continued shortage.  I think that it will be interesting to see how the system continues to roll out after the holidays and how this launch affects future launches by Nintendo.

So what do you think?  Is Nintendo outsmarting us all?  Will the company flood the market at some point soon?  Let me know in the comments.  And if you like this article, PLEASE send me a donation so that I can buy an NES Classic from a scalper on eBay.  I’m dying here.