Is luxury worth our money?

In the past, buying luxury often associated with getting  a product that was carefully crafted, and made of premium quality material and fabrics . Their shoes, jackets or dresses lasted for years. Each piece was unique, and often was considered an investment. This justified the high price of owning luxury. Today however the story is different…

Recently, my mom had a special occasion event for which she bought herself a branded dress. As the case with famous luxury brands, the price was huge. But imagine her disappointment, when she discovered that the dress was 80% polyester, and made in China. A brand that she thought she knew to be authentic Italian. So, after all  what is it that makes big brands so valuable if not the premium quality and material? Why luxury brands can charge us so high, for so little in return, and still achieve high revenues? Let’s first look at the pricing strategies behind luxury brands.

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Creating a sense of exclusivity through higher prices and scarcity 

Luxury brands have high brand value and brand equity. They target the wealthiest customers markets who are are willing to pay higher prices in return for exclusivity. So they can charge premium prices for their products and gain profits through sales margins, not sales volume (Wang, 2013). Indeed, the 24 anti-laws of marketting for luxury brands suggest that high volume sales can damage the value and appeal of luxury brands.  Luxury brands should rather aim at creating a sense of scarcity which increases desirability to owe their products and positively reinforce brand value and exclusivity. This helps explain why limited edition items disappear in seconds.

When it comes to luxury brands, high prices create high demand.

In case of high-end brands, the usual law of demand and supply functions in the opposite way (Wang, 2013). Higher prices will not decrease demand –  rather it will increase it. This is partly because the demand in this case is inelastic. Luxury shoppers are not price sensitive. They make-up a very loyal customer base, and often end-up having strong brand references and attachments that are not easily off-set by changes in prices.

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Kapferer and Bastien, authors of controversive book  “ The Luxury Strategy”, take this idea further. They suggest that: big brands should not only set ridiculously high prices, they should also keep increasing them overtime to drive sales! It seems like they have a point, because over last ten years the average product prices have almost doubled (Wang, 2013). A Hermes bag that costed $4,800 in 2000, is now priced at $7,600.

Higher prices  make products more appealing to their customers. Indeed customers associate higher prices with higher quality and more benefits. But in reality, is this so? Or is the price differential a superficial element marketers of luxury brands use to create value and attract wealthy customers?

That’s pretty much what my mom ended up thinking after reading the dress label. But it seems like her case is not exceptional.

“Today, the luxury industry is like monopoly. The focus is no longer on the art of luxury. It’s on the bottom line”  – Dana Thomas

After conducting research into luxury brands, Dana Thomas also heavily criticised high-end brands for loosing their edge, authentic and quality. Nowadays majority of luxury brands are ran by big corporations who seek to maximise profits. They begin to use “cheaper materials, outsource production to developing nations (while falsely claiming that their goods were made in Western Europe) and replace hand craftsmanship with assembly-line production” (Michiko, 2007).

So basically, today if you buy a shirt from Prada or Armani you have no actual guarantee of it’s superior quality or value over any other store next-door? Of course this is far from always being the case.The price set by brands is much more complex. Many luxury brands invest heavily into new technologies  (3-D printing) and engineering new fabrics. A lot of value comes also from the creativity and innovation of designers, the R&D process, distribution customer service, extended marketing (Wang, 2013). Yet, it doesn’t seem to justify the disappointment we feel when we read made of polyester on the label.

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Bottom line

Higher prices can often set misleading associations for us as consumers.  Luxury brands know the power of their brand image and value, and charge higher prices simply because they can. In many cases premium prices have little to do with the kind of quality or benefits consumers expect to get in return. Consumers must become more aware of this and quit taking high-end brands for granted.

Reference list:

Bastien, V 2015, ‘Marketting to a high-end consumer, using luxury strategy’, Entrepreneur, weblog post, retrieved April 27 2016, <https://www.entrepreneur.com/article/250745&gt;

Iacobucci, D 2014, ‘Marketing Management (MM4)’, South-Western, Cengage Learning, Mason.

Kapferer, J, & Bastien, V 2012, “The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands’,  2nd edn, Kogan Page, New York.

Michiko, K 2007, ‘The devil wears Hermes’, The New York Times, weblog post, retrieved 27 April 2016, <http://www.nytimes.com/2007/08/21/books/21kaku.html?_r=0&gt;

Sherman, L 2013, ‘Fashion inflation: why are prices rising so high’,  Business of Fashion, weblog post,  retrieved 26 April 2016, <http://www.businessoffashion.com/articles/intelligence/fashion-inflation-why-are-the-prices-of-designer-goods-rising-so-fast&gt;

Thomas, D 2008, ‘How Luxury Lost it’s Luster’, 1st edn, Penguin Books, New York

Wang, T 2015, ‘Value of Luxury Brand Names in the Fashion Industry’, CMC Senior  Theses, Claremont McKena Gollefe, retrieved on 27 April 2016, <http://www.scholarship.claremont.edu/cmc_theses/991&gt;

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