9: Pricing Luxury

"Expensive" is likely the first adjective that comes to mind when luxury is discussed. Merely being expensive is not enough to qualify for luxury, but there is in practice a very strong correlation.

While the authors will devote a chapter to its consideration, they concede it is not of particular importance: a genuine luxury customer does not place much consideration into the price and is willing to pay a seemingly exorbitant amount, and a little more or less is of no concern.

At the same time, there are many things that are considered to be luxury that are outside of the economy: beauty, art, happiness, leisure time, and the like are all free (or practically so). The qualities do not necessarily have to be delivered by a product or service that is purchased - and people on the lower levels of society find luxury in things that are very cheap by comparison.

Such things pertain to a very personal perception of luxury, but the luxury market the authors are speaking of is, indeed, associated to very expensive products and services that deliver luxury to the highest levels of society. In that realm, the notion that things are worth their cost remains a consideration: something that commands a high price must be a thing of high worth.

What about price elasticity?

Price elasticity considers the degree to which demand rises as price is lowered, which is a cornerstone of mass marketing that has little application to luxury.

One issue with applying elasticity to luxury is that it is an aggregation of behavior that fits a general pattern in a market with many suppliers and a high volume of sales. Luxury goods do not move in sufficient volume to create a regular pattern, and its buyers are largely indifferent to price increases or decreases: a change of five percent will not register a change, and must be along the lines of 30%. Hence the demand "curve" is not linear.

There is also a dead zone between the lowest price of luxury and the highest price of premium: when a product falls below a certain expected minimum expectation, demand disappears in the luxury market, and the price must be significantly lowered for the product to be sold at a much lower price before it is affordable to the mass market.

There are other examples in the luxury market where increasing the price of an item increased demand - though some speculation of whether this is because of snobbery (it is only wanted if the bourgeoisie cannot accord it) or because of a perception of quality (something must be wrong with the product if the price is too low).

Increase the price to increase demand

A luxury brand must raise its price over time in order to maintain its distance from other products. A higher price makes it more exclusive, hence more desirable to the luxury-for-others customers who are buying a badge of distinction. In economics, this is the Veblen effect, which is considered to be an anomaly, but quite common for luxury goods.

The problem with brand stretching is that it captures a less exclusive clientele, making the brand accessible outside of the luxury class, and diminishing its attractiveness. In many instances, lowering a price is interpreted as a sign of weakness and a harbinger of departure from the luxury universe.

The authors also stress that a product cannot raise its price to elevate itself. Luxury clients are connoisseurs and are willing to pay a high price for a luxury item, but quickly recognize when an item is not worth its price.

The price of a luxury good can be raised, but it must also be accompanied by an increase in the perceived value of the item. Moreover, its value must be increased in a manner that is meaningful to the client: gold-plating an item does not make it a luxury item.

It is also common for luxury items to follow a progression opposite to mass market goods in the introductory phase. Mass-market goods attempt to skim the market for those who will pay a high price, then lower the price to capture the bulk of the market. Luxury items may begin at a lower price to gain "pioneers" and then increase the price as the market grows.

What price premium?

The authors mull over the factors to consider when setting a price premium for luxury items - arriving at of at least 30% and preferably closer to 100% when compared to the most expensive premium item of the same nature.

Luxury goods should not be priced as a markup over cost, as is common for mass market goods. The price reflects the luxury status of the item, not the costs of its production. Nor is price in any way related to the quality of the item: the authors assert that there are brands of sparkling wine that are much better in terms of quality than genuine Champagne, yet the genuine article still commands a significant price premium because it is rare and authentic.

Luxury watches are presented as an example: for premium watches, the price varies according to the market value of gold, whereas luxury watches do not: the premium is sufficiently high that the maker can absorb the rising cost of materials without increasing the asking price.

"True luxury is attained when you have the complete freedom to set your price." As an example consider that some of the greatest Swiss watchmakers offer limited editions that sell for more than 1 million euro.

Fixing the price in luxury

While price is not a major factor in the strategy of a luxury brand, it is nevertheless as crucial operational decision.

You must first understand the competition properly: luxury customers are not concerned with affordability, but in paying a fair price. This is not quite the same as mass marketing, where a product is seeking to position itself according to price, but merely ensuring that the price is in the right range, with a great deal of latitude, given the value of the product. Said another way, the luxury price should be legitimate to the brand and the product.

There's some reference to the symbolic value of a luxury brand (EN: A concept that isn't quite clear to me, but seems to do with the willingness to pay a high price for luxury "just because"), which can only be assessed by offering the product at a lower price to being with and raising it to determine how much the market will value it.

Ultimately, the seller can set any price he cares to, but the market will respond to indicate if it is appropriate.

Managing the price over time

A price is set at a given point in time, and while the price may be set appropriately, it will not remain so, and requires ongoing management. To this end, the authors have a handful of suggestions:

Price policies linked to the offer

The seller's price is only one element of the sales offer: the buyer considers not only the price, but what he will be getting in exchange for that price. Over time, the offers in the marketplace will change, such that offers of other firms may become more attractive.

Keep in mind that luxury sets the price - the luxury consume does not do the same calculations as the mass-market consumer, whose decisions are influenced by the desire to get the most value from his constrained budget. The luxury customer is not thus constrained, so affordability is less of an issue. He considers merely whether the price is appropriate to the offering.

Given that luxury is global, and that it is a favored target of governments, the price of a luxury item is heavily influenced (increased) by taxes, duties, customs, and the like, which can in many instances exceed the necessary costs to physically transport the item.

This is the reason many luxury customers take shopping trips: most regulators are concerned with the profit made by selling an item, and less concerned with the value of personal possessions. Hence it is generally much less expensive for the buyer to travel abroad and bring back items as personal possessions than for the seller to send merchandise to be sold in the buyer's market, though the net effect is the same.

Functional concerns aside, it is also a social distinction of a certain class of customer to be able to spend the time and money to travel abroad and bring home luxury items (which itself is a kind of ordeal or quest), as opposed to the lower classes who may only choose from what is on offer at their local market.

Lastly, there is the matter of distribution control: when the various fees applied to a luxury item drive up its price considerably, this constitutes an attractive opportunity for the black market to smuggle the item into the country, which damages the brand.

As an example, the authors consider the problem that Vuitton faced in Japan, where various taxes for legitimate sales increased the price of their bags by around 40%, prompting buyers to travel to Paris to purchase them. But then a customs was placed on the bags of about 30%, such that it was not an extraordinary bargain. However, if the bags could be smuggled into Japan without paying any of these taxes, it could be very lucrative.

The obvious problem is that smuggled Vuitton bags became a source of profit for organized crime, and purchasing a LV bag fro ma shady character in a back alley was not the desired customer experience. But also, this placed pressure on the LV workshop to pump out the bags in quantity, which put in place a "one bag per traveller" policy (which was contrary to French law) - which in turn was easily circumvented by criminals stopping travellers on the street and offering them a cash commission to buy an LV bag.

When a product is very high in value and its physical size is small, such as jewelry and watches, it becomes the target of smugglers. The only effective for a luxury item is to set a global price that is the same everywhere, accounting for exchange rates, such that there is no profit in smuggling.

Naturally, this means that the manufacturer must bear the cost of transportation and taxes - but a luxury item should be sold at a sufficient margin to enable the producer to accept the loss and still remain profitable.

Duty-free zones are an attempt by governments to eradicate the effect of their tariffs on imported goods by offering products cheaper in the local market in specific areas, generally in airports, than they could otherwise be purchased in local shops.

The authors consider this to be a "separate universe" and give in only marginal attention, except to remark that it is often a method of overcoming taxes on items like alcohol and tobacco, or to sell items such as perfumes.

Pricing policies linked to demand

Pricing a product according to demand, rather than its costs of production and distribution, was "originally the norm" in luxury.

Consider the travel industry, in which price during the "off season" is significantly discounted due to demand cycles. It is generally accepted, and does not diminish the perception of luxury, that a five-star hotel offers off-season rates.

There are also limited-time offers in luxury that are not mean to drum up short-term demand (which is often the case in the mass market), but to provide access for a limited time without diminishing the reputation of the brand.

The author's specifically mention travel offers extended to newlyweds (a limited time period to the customer, rather than the supplier), in which customers are given access to a luxury cruise or resort at a discounted price, in hopes that their experience will cause them to purchase at full fare later (on significant anniversaries, couples return to the place they spent their honeymoon).

In general, this is much better tolerated by the luxury clientele than a "last minute" offering in which opportunists are allowed to get the same room at a lower price than loyal customers who book in advance. This creates resentment of the brand because it is not a justifiable as a newlywed discount.

A few principles for considering such programs:

The notion of auction sales is also mentioned, as it was originally reserved for exceptional products (fine art and historical artifacts) who drove the price of items up, but is now teeming with discount-seekers hoping to get something for a very low price. On one hand, this supports luxury by facilitating a second-hand market - but on the other hand, it does cheapen luxury goods. (EN: The authors don't provide advice, but it is fairly obvious that using auctions to liquidate inventory of new products could be devastating to luxury brands.)

No sales in luxury

The notion of a "sale," a short-term reduction in price to drum up business, is the total opposite of luxury.

The authors maintain that any brand that hold sales events is disqualified from luxury.

Fashion items may be an exception, but it still raises the question as to whether they are genuine luxury items. A luxury garment does not go out of style in the way that fashion items do, and the inventory of "old" goods maintains value and does not need to be liquidated.

The authors laud Louis Vuitton, which is well know for its practice of destroying unsold stock rather than selling it at a discount. This is strict adherence to the necessity of luxury.

Price reductions

Not all price reductions are "sale" events, and in some instances a firm can lower the price without debasing the esteem of the product.

One legitimate reason for offering a lower price is when a customer seems bored of the brand because they already own many of its products. The key point here is that the customer admires the brand, and is already a customer - and the lowered price rekindles their interest and rewards their loyalty to the brand.

Another legitimate reason is to introduce products to the client: they may own the firm's primary product but be unaware of additional offerings, and may not be motivated to pay full fare. In essence, this is offering a discount on a sample that is expected to generate additional demand at the full-fare price.

Of particular importance is that, in both instances, the brand is offering a reduction to someone who is already a customer to incent them to purchase more. It is not offering a discount to a non-customer to cajole them into purchasing for the first time.

The price and its communication

A significant point about the price of luxury items is that ikt is unspoken, which is to say that people are "always thinking about it, never talking about it."

High price is an expectation and qualification of luxury. The authors attribute to Charles Rolls (cofounder of Rolls-Royce) the common quote that "If you have to ask the price, you can't afford one."

As such, price should be an understatement: clients should have a general sense of the price level, but not be obsessive about the exact price. This is also true of the broader population, whose respect for those who own luxury items stems from the notion that they paid a significant price for them, and that luxury items are out of their reach.

It is, in fact, desirable for the presumed price to be higher than the actual price. It is a pleasant surprise to the customer that the item costs less than he thought, but he still wants others to think he paid far more than he did - and this is particularly true when a luxury item is given as a gift.

Correspondingly, it is common practice in luxury to never publish the actual price in advertising - or at worst, to mention it very discreetly, as well as to avoid mentioning the price in the shop until the moment of purchase.

It's also noted that, in the shop environment, you can assume that the customer is already "sold" on the product and their only uncertainty is over the price. As such, the vendor must sell the price, not the product. Sometimes, it is not sold at all, as many luxury customers are entirely indifferent to the price of an item, and sign the bill without even looking.

More specifically, the price of the item isn't "sold" but merely justified. The seller explains the value of the product, the details of its manufacture, the source of its materials, and the like. He does not mention the price, but provides details that support the notion that the client is getting a great deal of value.

Price: the two challenges of the luxury strategy

The authors mention two specific challenges to luxury pricing:

Entry Products

Entry products are often used by luxury brands to attract new customers and help them to enter the brand universe at a lower price point, in hopes that they will join the club.

A new customer who is enthusiastic about the brand may be willing to leap in with both feet and pay full fare, but others have less knowledge of the brand and are reluctant, hence they are curious about the price.

This contradicts the need to keep the price a mystery - but it would be damaging to luxury brands to be open about the price to the general public. As such, they must maintain secrecy in the general market, but find an elegant (rather than blunt) way to make the price known to the entry-level buyer.

Focusing too much attention in onboarding new clients has the potential to damage the brand. As such, authors suggest that brands should have very few entry-level products, should attempt to grow slowly rather than quickly, and maintain a discreet distance between entry products and the main line (for example, selling wallets cheaply but maintaining a high price for handbags).

The authors consider Apple to have done this masterfully: people can purchase a cheap iPod to play music, and managing their media is much easier if they purchase a Macintosh computer - but Apple ahs never decreased the price of its computers. A 2007 survey indicated that 37.5% of people who bought an iPod were considering a Macintosh, and an astounding 75% of Macintosh owners were introduced to Apply by the iPod.

The Internet

Prior to the Internet, companies had very strong control over the communication of their pricing. People could spread information about the price by word-of-mouth, but this occurred very slowly, and the media could leak the price, but very seldom had an interest in doing so.

Now that the Internet and social media enable people to reach a vast number of consumers, it has become a serious issue - even so because when a person engages in the vulgar behavior of bragging about the price of their possessions, the brand becomes associated to that sort of personality.

One compromise some brands have made is to disclose the price of entry-level items and sell them there, but to maintain secrecy about the price of the main line and refuse to sell them online. This gives the vulgar types something to brag about other than the main line. (EN: This is based on the assumption that the type who brag are not genuine or established members of the luxury class.)

In spite of this, the Internet should not be regarded as an enemy - it is an excellent channel for building awareness and respect for a luxury brand. It is more in the nature of an indiscreet friend, who promotes the esteem of luxury by sharing some information, but does not seem to realize the harm it does in sharing certain other details.