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13: Luxury Business Models

Very small organizations can be managed day-to-day with only a vague notion of the processes by which they create and deliver value to their customers and other stakeholders. But when the organization grows, even to a fairly modest size, it becomes necessary to carefully consider these processes and develop a business model to ensure that all participants comprehend the basic mechanism of the firm so that they may act and plan accordingly.

In luxury, the value delivered to the customer is always a combination of good and service, and whether one or the other is dominant is a significant factor in defining the business model.

More specifically, the authors identify two models for luxury goods (one for firms whose core product is sufficiently profitable to sustain the organization, another for those who must stretch the brand to be profitable), another for luxury services, and two very specific models for perfumes and technology.

Luxury products with a profitable core trade

Ideally, the core trade of a firm is sufficiently profitable to provide for the firm's long-term survival.

This is very often seen in instances where the core product is often used and highly visible, and less often seen in firms whose products are only occasionally used and very seldom seen by anyone but the consumer.

Consider the example of Luis Vuitton, whose core trade is the travelling chest. During he golden age of travel, the travelling chest was used daily (it served as a wardrobe in hotels and cabins) and was highly visible (a traveller's chest was seen by other travelers), but as the nature of travel changed, the brand needed to branch out into other products such as handbags, watches, textiles, and other products.

Another example us Audemars Piguet, which began in 1875 with the manufacture of "haute horlogerie" (fine watchmaking), a product which even to the present day is worn daily and seen, and as such the firm has not needed to extend its brand to any product other than wristwatches. (EN: It should be interesting to see if this remains sustainable, as people seem to be abandoning wristwatches because mobile devices make them unnecessary.)

At the product level

The authors provide a list of bullet points:

• A luxury brand focuses on a core trade, either a single product or a line of closely-related ones
• In the latter instance, the products focus on a very narrowly focused set of clients' needs
• The products are "permanent" for the firm - with extremely few exceptions, a brand maintains its core trade for decades or centuries
• The core products sell at a level that is profitable enough to sustain the firm
• Where multiple lines of product are offered, the most profitable ones are in the middle range. Lower products are entry products on which price is reduced to introduce a new customer to the brand, and high-end products are showpieces whose costs may exceed their revenue
• If new product/line is sold at a higher price, it strengthens the luxury brand; of sold at a lower price, it weakens the brand.

At the production level

A few more bullets:

• The entire process of value creation, from the production workshop to the customers' use of the item produced, is tightly integrated
• Subcontracting is kept to a minimum, wit the ultimate goal of having complete vertical integration so that the entire production process, from raw materials to finished goods, is controlled
• Production takes place in small "artisan workshops" rather than huge mechanized factories. It is generally inaccessible to the public, and has the character of a monastery.

At the distribution level

In luxury, the contact between the retailer and the client is of such critical importance that it is "totally unthinkable" from the brand to be sold by people who are not part of the brand universe.

Financial Results

Excruciating rigor in the business model is rewarded with enormous profits. Consider that in 1972 Vuitton had faded to the point where the brand was worth less that $20 million, but by regaining it footing it has become worth an estimated $26 billion by 2008

To achieve such exceptional performance, firms must have supreme competence throughout the business. Design, production, distribution, and communication must not only be done to perfection, but thoroughly integrated.

An essential characteristic is that the middle ranges of products drive the profitability of the firm. The upper end of products are showpieces that build the image of the firm whose extreme cost of production make them unprofitable, whereas the lower end of entry products are intentionally sold at a very low margin as possible to be accessible to the "future faithful" of the brand - they are not economy products, but are not profitable.

Pitfalls

The authors discussed the differences between brand extension and brand stretching in chapter seven, with particular attention to the ways in which extending the brand to an overly broad or cheap array of merchandise can disqualify a brand from luxury. Hence a luxury brand must be extremely careful not only in offering additional products or lines, but also in maintaining the esteem of the core product.

The authors discussed the differences between brand extension and brand stretching in chapter seven

There are truly successful conquests of new territory, which often occur when demand for a core product is dying out and the firm must evolve into new trades. In some instances this is an evolution within a given sector (such as Vuitton moving from travelling chests to purses) that follows an evolution of a given set of needs, but in others it is a more ambitious jump (ST DuPont moving from cigarette lighters to pens) that occurs when the nature of evolution is extinction.

The method of evolution or extension derives not from the company's desire to generate profit or to create a new product, but from the need to serve the changing needs of the market. In essence, if luxury is to be sustainable, it must focus on the client.

Another major risk is, as management of the firm passes from one generation to the next, the new members remain faithful custodians of the brand. It is all to common for new management to wish to prove its talent by simply rejecting the past and branching out in its own direction, which can be lethal to a luxury brand. The example is given of grand restaurants which do not change their menus with the seasons simply because the cooks become tired of producing the same dishes.

That is not to say that a luxury brand does not evolve, but it does so slowly, and never in a dramatic way: to preserve a quality of timelessness, luxury must bridge the past and the future, not abandon one for the other.

Another risk of diversification is in the fragmentation of a brand: where different teams are responsible for different products they tend to become myopic to their own affairs, and neglectful or even hostile toward the brand as a whole. That is, each product manager thinks of his product only, and has difficulty admitting or accepting that his is not the most important to the brand, just as an actor in a supporting role may carelessly upstage the lead. This narcissism must be curbed if the brand's performance is to remain exceptional.

Whereas acting to ameliorate the lassitude of the staff can be a danger to preserving the esteem of the brand, failing to react to the weariness of the clients is much more serious. It is the customer who decides when a brand has become old-fashioned and is no longer desirable, and failing to pay attention to dwindling enthusiasm can cause a brand to become unprofitable, even though it is regarded as luxury.

Also, a luxury brad must remain luxury-for-self primarily, and luxury-for-others as a secondary function. Should the brand become associated with vulgar ostentation, lacking a base of valid aficionados, the brand itself become vulgar and undesirable. Especially when a brand extends too far into the lower markets, reaching poseurs rather than future faithful, it may lose its esteem.

A too-restricted core range

In some instances, a luxury firm may have a core range that is prestigious, but unprofitable - whether they production cost is high or the firm is unable to sell in sufficient quantity to generate a profit that will sustain the firm. In these instances the core product represents a dream that must be sustained through selling other products.

When firms produce multiple brands, the pyramid and galaxy models originally mentioned in chapter seven represent the ways in which the firm may regard its product offerings as a whole.

When firms produce multiple brands, the pyramid and galaxy models originally mentioned in chapter seven

The pyramid business model

The pyramid model begins with a luxury brand at the apex, then extends downward with additional products, often reaching down into the premium and even standard markets.

The most obvious example is haute couture fashion, which makes original clothing for each client, then extends to the ready-to-wear market to capture income from premium customers, and then to off-the-rack sales in department stores for the mass market. This practice has led many luxury brands to lose all legitimacy.

Some brands seek to protect their core product by stretching downward with other product lines: the clothing may remain haute couture by the firm also licenses fashion accessories, watches, cosmetics, and other products for sale at lower tiers.

There s some question about how much of the luxury brand's identity is carried down the line. It's generally accepted that simply stamping a luxury logo in cheap goods is not sufficient, but the greater the legitimacy given to low-end goods, the more it erodes the status of the luxury brand and dilutes the creative energy of the firm.

Contamination from below is also a risk: the firm becomes more focused on the lower lines, for the sake of the profit it brings in, that the core product is starved and withers. Where the sustenance of the brand is dependent on income from accessories or cut-rate products, its status as luxury is in serious jeopardy.

Chanel, for example, has maintained a pyramid model that has had lasting success. Its core product is haute couture, but it has added a number of highly successful lines that are accessible down to the premium market, yet without diminishing the esteem of the core line. It's suggested Chanel has done this by maintaining a high standard of quality, ensuring any extension/stretch products are not its main line (clothing), maintaining control over distribution, and carefully managing the elements of the brand that are carried to lesser products so that it is neither too little nor too much.

Armani, meanwhile, did not start as haute couture but instead had a few different lines of luxury clothing, and as such had a void at the top of its pyramid. When the firm began to offer additional lines at department stores, this resulted in confusion that dragged its core trade into the premium market. When the firm began offering jeans to younger people, and courted the mass market with the "Armani Exchange," its fall from grace was complete.

A few other examples are offered, but in scant detail:

• When furs fell from fashion, Fendi integrated into a luxury group and has become a diffused brand offering perfumes, purses, clothing, furniture, wristwatches, shoes, etc.
• Dior also became a department store brand of clothing, attempting to support itself with accessories
• For Pierre Cardin "only the base of the pyramid remains" having completely abandoned luxury goods to compete in the mass market.

The galaxy business model

The galaxy model is one in which there is no downward extension to premium: there are multiple luxury brands that have no hierarchy, and are entirely separate, perhaps arranged in a constellation. Extending the metaphor, the company that manages a galaxy of brand is likened to a black hole, a center of gravity the influences the alignment of the stars but is itself largely invisible.

In the galaxy model, the brands remain sovereign, operating as if they were entirely separate companies. Any similarities between them are incidental, and the success of one does not depend upon the success of any others. There may be synergies among the brands, but the firm provides them to the brand as opportunities to consider, and reject if they would compromise the esteem of the brand.

Naturally, the risk with such a model is that the brands are not cohesive, and attempts to compel cohesion can erode the brands, but there must be constant vigilance to keep them in the firmament. That is to say that the central office works to encourage them to remain within luxury, but does not dictate the means by which they should do so.

It's also suggested that a galaxy model is often a menagerie of the dreams of a single person, but as that person loses interest or energy (particularly as they age), then the galaxy descends. Both Ralph Lauren and Pierre Cardin were once luxury brands, but the men behind them failed to maintain the dream and standard of luxury, and so both fell to the premium and mass-market levels.

There is some evidence that when the person behind the brand falters or perishes, the brand will falter and perish as well.

The perfume business model

Perfume is a highly idiosyncratic product. From a functional perspective, we recognize that smell does not matter. But at the same time, it deeply ingrained at the instinctual level that a person's scent is very important, as it identifies them as a member of a group. When everything we see and hear leads us to a given conclusion, we remain doubtful and uneasy if something "smells wrong." Perfumery addresses this deficiency in a very literal sense.

The specific characteristics of the perfume market

The authors speak to three specific characteristics of the perfume market.

First, you do not communicate about the scent - which seems absurd as the scent of a perfume is the primary benefit sought by the consumer. It many instances, it is impossible to communicate the scent of the product: the mass media are focused on sight and sound and have no method of transmitting smell.

It is possible to speak of the scent of a perfume, the combination of fragrances that are concocted to create its unique aroma, nor can words effectively describe a scent with which a person is not already familiar. Therefore this is not done: communication focuses on imagery that evokes emotion related to the scent, but the consumer does not actually sense it outside the retail environment.

(EN: This overlooks scented advertisements of sample phials, and my sense is that these are likely bad ideas. In magazine advertising, it is very expensive to add a scent strip, and the magazine itself becomes overpoweringly smelly if there are multiple scent strips for different brands. Even for direct mail or samples, the scent may be experienced in an undesirable environment.)

Second, perfume is a product with a long lifespan and is frequently purchased. The consumer wears the scent often, and it fades over time. There is some referenced to the bottle as an artifact that is kept even when the product has been used, but as luxury items go, perfume is one of the few that is consumed and repurchased with frequency. This also places it on the fringes of luxury

Finally, perfume has very high gross margins but its final profitability is modest. It was at one time a highly profitable trade until the market became competitive - now most of the gross profit is spent in publicity, simply to remain in the mind of the customer. Launching a new perfume is extremely expensive.

Perfume as Luxury

It is arguable whether perfume can still lay claim to being a luxury item at all. While the scent of perfume is noticed, there is no visible trace of the brand. The wearer of a perfume still benefits from having a pleasant scent, but no-one is aware of the brand they use, and does not associate one to the other.

Promotion, itself, becomes a problem because it places the luxury product in direct competition with, and therefore in the company of, non-luxury brands, which calls its authenticity into question.

Since perfume is purchased frequently, its pricing tends to be relatively low, such that it is relatively easy for scruffy people to afford luxury perfumes. For example, the esteem of Ralph Lauren evaporated quickly when every bowling alley reeked Polo cologne.

The pressure of distribution also eradicates the distinction of luxury perfumes: because of the need to frequently repurchase, few are willing to travel to a brand boutique to obtain it. As a result, perfume must be sold in many locations, including department stores and the Internet.

Those few perfumes that have managed to remain in the luxury market are not sustainable. A luxury perfume is an accessory to a line of fashion clothing, sold in low quantities in boutiques. In that way, the perfume can support regular contact with customers (who will visit to restock perfume more frequently than to purchase clothing), but luxury perfume is not viable on its own.

Segmentation of the perfume market

Perfume remains a "luxury" in the sense that it is not necessary and some degree of personal esteem is invested in the product.

For that reason, around half of the market consists of perfumes that are an extension of a cosmetics brand and the other half is extensions of a clothing brand. The two coexist in the same distribution networks and are sold in the same price range.

(EN: I don't think this is a very thorough consideration of segmentation in the perfume market. There are many brands that are not associated to either cosmetics or clothing, and there are a plethora of cheap perfumes sold in drug stores and supermarkets.)

The authors later consider the classification of perfumes as being derived from three qualities:

1. Gender - it is a men's or women's fragrance
2. Core motivation - it is purchased for personal gratification or to make an impression on others
3. The desired psychological effect the wearer wishes to produce

The business models of luxury and premium perfume

The luxury approach to perfume couples the product with a line of luxury clothing. The perfume is not a stand-alone product, but a supporting one in maintaining the dream of the parent brand. That is, the scent accompanies the clothing. In this model, the perfume is not managed as an independent product, and is not launched as a stand-alone, but is introduced as an accompaniment to the core product.

In some instances, a perfume can outshine the fashion (such as Chanel No. 5 or L'Air du Temps), in which case the perfume falls from luxury into the premium range, whereas the fashion clothing remains in the luxury range.

In the premium market, a brand may be treated as an extension of a fashion or luxury line, but may more often stand alone as a product. It can be advertised and distributed on its own, because it is a commodity rather than a rarity. In this model, the emphasis is on the demands of the market, not the quality of the product or a link to the creator, and there is heavy advertising that resembles a string of re-launches.

The business model of luxury trades with very high overheads

Luxury products have an enormous gross margin: while the products are more expensive to produce than mass-market products, the markup is also highly disproportionate. Luxury is not priced according to the cost of production, nor is it priced to stimulate demand - the price is never advertised and very seldom communicated.

In one sense, luxury brands can "get away with" such enormous markups because their clientele can well afford to pay for luxury - they not only accept that there is a high price, they even wish to pay a high price to maintain the exclusivity of their possessions. That is, the price itself makes the item rare and exceptional because members of lower social classes cannot afford it.

But in another sense, a high margin is necessary to cover the enormous overheads that are necessary to the luxury brands. The increased price of production materials is not significant, but the increased cost of maintaining a production facility, retail facilities, distribution networks, and marketing activities while at the same time selling a very low unit-volume of merchandise require a high margin.

Price Discrimination

The authors maintain the principles that the price of a luxury good must not be widely communicated, nor used as an method to drive volume by having "sales" - but this does not mean that luxury does not lower its price or offer discounts. It often does so, but very discreetly, with careful attention to the impact on those who have paid full-fare versus those who have received a discount.

The danger in discounting the price for some is that others who have paid full fare will likely feel that they have been swindled into paying a higher price. This is a moral issue rather than a practical one - the full-fare customer can well afford to pay it and felt the product was worth the price, but may feel indignant that someone else got the same for less.

This resentment can be mitigated if the full-fare customer understands the reason: if the cut-rate customer gets something less for a lower price, or if there is a plausible reason for a special exception extended to some customers (a special rate for honeymooning couples), it rankles less.

However, there still remains the perception that the bar has been lowered and that an individual who is not worthy of the prize has been awarded it, which diminishes the distinction of the prize. This is more difficult to appease, but may be mitigated if the full-fare customer recognizes that the cut-rate customer is qualified in ways other than wealth (intellectuals, who make a low income, are welcome among the wealthy elite) or will become qualified (a recent graduate from an ivy league school will take some time to build wealth, but it is expected he will eventually "arrive" into the luxury class).

For the cut-rate customers to respect the status of a luxury item, it must also be clear to them that the discount they are receiving is unusual, and that they cannot expect to get a lower price every time. If they believe that they are getting a discount because of their own shrewdness, then they regard the item as merely being overpriced and not a true luxury.

There is also a distinction to be drawn from the manner in which a luxury good is consumed. It is significant whether the enjoyment of the product is shared (full-fare and cut-rate customers mingle on a luxury cruise) or separate (full-fare and cut-rate customers get the same product but do not interact with one another).

However, the chief difference seems to be the duration of interaction: those who have separate enjoyment will have brief encounters, those with shared enjoyment will have extended encounters. In both instances the cut-rate customers are likened to party-crashers who do not belong in the company of the elite - which is uncomfortable for both parties.

Sidebar: Luxury Travel

Having mentioned luxury travel as an instance in which the cut-rate and full-fare customers mingle for an extended period of time, the authors take a side-trip into the realm of luxury travel.

It's noted that luxury travel is not merely in getting better accommodations, but also in getting preferential treatment. Consider that the airline industry creates some separation between its first-class customers and those in steerage by providing a separate waiting area (the first-class lounge) and separate cabins, curtained off from one another. At the same time, first-class customers are boarded first: they are ushered past the lower classes, who gawk at them like peasants who kneel as a nobleman's coach passes.

Singapore airlines is presented as a model of luxury business travel, whose first-class service truly surpasses that of their competitors (and even their steerage service far exceeds the quality of standard carriers).

• SA has virtually always been the first to launch innovations to improve customer experience on board as well as on the ground.
• SA has the most up-to-date fleet of any airline
• The embodiment of the SA experience is the "Signapore Girl" stewardess, likened to a Geisha in her personal refinement and the level of attentiveness to an esteemed clientele.

In terms of restaurants, it is well known that food service in a standard hotel is a convenience that is provided at a financial loss, but restaurants in luxury hotels are highly profitable, sometimes contributing as much as 20% of the profitability of the property. Luxury restaurants are often built around the persona of a great chef - Robuchon, Gagnaire, and Ducasse are the brands of haute cuisine. (EN: The same is true of premium restaurants, which are built around the personalities of television chefs such as Pucl, Lagasse, and Flay) - and become dining destinations rather than conveniences.

Brief mention is made of luxury hotels as being likened to palaces, where the elite customers enjoy plush accommodations and a high level of attentive service from the staff.

In general, the authors identify four areas of innovation in luxury travel:

• The adaptation and extension of service - the amenities of the first-class cabin are extended to the first-class lounge
• The addition of ancillary services - such as placing a personal butler and a chauffer-driven Bentley at the service of each guest at a luxury hotel
• Special accommodations for a specific target - for example, providing services that are suitable to the children or pets of hotel guests
• Adding unusual factors - such as transforming the court fountains into a skating rink during winter months.

The 'high-tech' business model

While the high-tech industry is highly prominent and important in the present day, it is not of much interest to luxury. High-tech is in many ways inconsistent with luxury:

• Technology products are valued for their basic functionality
• Technology firms focus almost exclusively on the product itself and are infamously indifferent to their clientele, providing very poor service quality
• Products are assessed comparatively: the "best" is the one that does the most
• Technology products have a very short lifespan and quickly become obsolete (and completely so - they will not come back into vogue as happens with clothing fashions)
• The elite users of technology are impatient to have the latest
• Technology is complex, and users must undertake personal effort to get service from them

Technology can support luxury by making a luxury product more serviceable, and there is some esteem to having the most sophisticated and powerful possessions.

As such, luxury technology firms are very rare. The author considers the example of Bang and Olufesen, which begain in 1925 and provided products of such elegance and sophistication that some are displayed as works of modern art in the NY museum - but the focus was on the design as an object of art as well as one of technical sophistication. The company has struggled because its technology generally lags premium competitors such as Bose, but has nonetheless managed to maintain a luxury strategy.

Crises and luxury business models

In the present day, there is a focus on the economic crisis, but it bears remembering that this is not the only form of crisis a brand may face: the essential characteristic of a crisis is that the brand or the company is in jeopardy, generally due to decreased demand for its products in the market, which could arise from other causes (competition, changes in fashion or lifestyle, etc.)

Mass-market firms have dramatic reactions to crises - they reduce prices to maintain volume, or they reconfigure themselves radically. Luxury firms meanwhile seem almost indifferent to crises - it is all the more important for them to stay the course and maintain their status in the face of danger and resist the urge to react out of fear, as a short-term reaction can be far more detrimental to the brand than merely weathering the temporary loss of revenue.

The luxury strategy is very resilient to crises

Economic crises have been perennial, and each time a new crisis arises "experts" write sensational articles explaining how the situation will mean the death of luxury, and the same people end up writing articles explaining how luxury survived the crisis. Exacerbating the emotions of the uneducated is the stock and trade of the media. True luxury is extremely resilient, and entirely crisis-proof.

By contrast, luxury struggles in a booming economy, when there is a great deal of "new money" that gives more people the means to purchase expensive things, but not the taste to know what to purchase. In the same way that a high price does not qualify a product as a luxury item, high wealth does not qualify a person as a luxury customer - and when low, vulgar people suddenly have cash and enter the luxury shops, the genuine luxury customers are affronted, and the esteem of brands that show the same deference to the temporarily-wealthy is damaged.

An economic crisis therefore strengthens the esteem of luxury by removing disqualified customers, the day-trippers and poseurs are no longer able to willing to purchase luxury items, but the true luxury customers remain - and demonstrate their superiority by continuing to purchase luxury brands in times of economic hardship. A brand that has no genuine claim to luxury, but sells expensive products to a market that is mostly unqualified buyers, is in serious jeopardy of being unmasked.

Thus considered, an economic crisis tend to decrease the total revenue of a luxury brand, which poses a temporary problem, while at the same time weeding out the market in a way that increases the esteem of a luxury brand, which is a long-term benefit.

Luxury sales are over-reactive to economic fluctuations

The human story behind the economic statistics is one of prosperity, or the ability to consume goods and services.

• When the economy is flat, no-one thinks about it and consumers fall into habitual patterns of consumption and don't give much thought to the future.
• When the economy is growing, consumers have the means to consume more than they are accustomed to, so they can purchase more high-price items and expect the trend to continue
• When the economy declines, consumers no longer have the means to consume as much as they are accustomed to, and fear the trend will continue, so they decrease their consumption of high-priced items

Naturally, statements about "people" and "the economy" are generalizations. The fortunes of an individual person are independent of the overall situation, such that some people may experience a growth or decrease in income contrary to the prevailing economic conditions.

It's also significant that people may express optimism, but feel pessimism - the fear of pain is psychological much stronger than the desire for pleasure. As such people who experience good fortune are fearful that the good times will end soon, and people who experience bad fortune are fearful that things will get even worse. This fear and concern, more so than the objective amount of money they have, is what influences purchasing decisions.

The sales of any non-necessity item drop when fear and doubt arise. This is true for all product classes - economy, standard, premium, and luxury - but is more pronounced for premium and luxury items because their higher price has a greater impact on the buyer's financial reserves, which they are seeking to maintain.

Particularly for wealthy customers, whose routine income depends more on returns from their investments than wages for their labor, there is great sensitivity to market fluctuations. A detailed study (Sahalia et. al. 2004) demonstrates a strong correlation between stock market returns and luxury sales (as well as charitable contributions).

Specifics of the luxury strategy in crisis time

During the beginning of an economic crisis, there will be a sharp drop in luxury purchases from unusual or irregular customers (poseurs, day-trippers, and people on the verge of luxury) which can be very harmful to weak luxury brands who use entry products to finance their operations, but not as damaging to true luxury brands. As to the genuine luxury customers: sales to luxury-for-others customers will decrease. Sales to luxury-for-self customers may also diminish, but these purchases are merely postponed.

During the middle of a crisis, sales will rebound from the genuine luxury customers. The luxury-for-others customer still feels the need (and has the means) to keep up appearances, demonstrating that he is still all right in the economic difficulty. The luxury-for-self customer seek to consumer luxury items to relieve his anxiety and assure himself that he is still all right. Moreover, there is a tendency of customers in both groups to purchase even more than usual, as a reward to themselves for having waited.

This is based on the assumption that a luxury brand does not cut its prices to maintain sales during a crisis - and maintaining prices is an absolute must. The value of the luxury item as an award or reassurance is diminished if the bar is lowered to allow weaker buyers to purchase, such that a decreased price will harm demand of the genuine luxury customer. Moreover, lowering the price will not increase sales dramatically from the unusual or regular customer: they have made the decision that luxury is too expensive, and even a significant price reduction is unlikely to change their minds.

The luxury brand is strengthened

The wealth of genuine luxury customers may be diminished by an economic downturn, but is still so expansive that it does not impact their lifestyle or compromise their ability to purchase luxury goods. Their purchasing habits may stutter temporarily, but do not change.

Meanwhile, the wealth of individuals who are not genuinely wealthy, but merely enough for them to dabble in luxury, is not so much that they can weather an economic downturn, and they must significantly alter their purchasing habits, terminating their consumption of luxury goods, until the economy recovers.

In this way, an economic downturn cleans the market, removing unqualified buyers, and restoring the exclusivity of luxury.

In the same way, genuine luxury brands are little affected by economic downturns because they have a genuine luxury clientele. Brands that are high-priced, but not genuine luxury, falter because they depend of a weak clientele.

It is also true that a genuine luxury brand may crumble for financial reasons: the brand may be regarded as luxury and purchased by genuine luxury customers, but if the firm is poorly managed such that a temporary downturn can topple the firm, it will perish.