Beyond the value: How luxury brands define their prices

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In the world of luxury and premium, the price is more than just a label, a number; it’s a statement of value, a symbol of status, and a promise of exclusivity. While in other markets, the price often reflects the relationship between supply, demand, and cost, in the luxury segment, price setting is a strategic tool that communicates the brand’s identity and positioning. In this article, we explain the various pricing strategies in luxury and premium.

1. Perceived Value vs. Real Cost

In the realm of luxury, the line between the actual cost of production and the value perceived by the consumer can often be blurred and widely discrepant. When purchasing a luxury item, we are not just paying for materials and craftsmanship; we are investing in a story, a legacy, and the promise of belonging to an exclusive group.
To understand this dichotomy, several elements must be considered:

• Brand History: Luxury brands often lean on decades, if not centuries, of history and tradition. This longevity carries with it a rich narrative that increases perceived value. For instance, the tale of a Swiss watch that has been made by the same family for generations, or a fashion brand that has dressed royalty.
• Quality and Craftsmanship: Although the actual material cost might be a fraction of the final price, the level of detail, artisan skill, and precision involved in creating luxury products justify a higher price tag. These products often carry with them hours of manual labour demanding years of training.
• Exclusivity: Part of the allure of luxury products is their rarity. Brands play with limited production to create a sense of urgency and exclusivity. While the actual cost might not vary significantly, simply owning something few possess can significantly elevate its perceived value.
• Emotion and Connection: Luxury products often evoke strong emotions. Whether it’s a car symbolising personal triumph or jewellery marking a significant moment, consumers are often willing to pay more for items that establish a profound emotional connection.
• Advertising and Marketing: Advertising campaigns for luxury brands tend to be more elaborate, featuring high-profile celebrities and top-tier productions. This investment in branding and positioning also reflects in the product’s price.

Therefore, **while the actual cost of production is a consideration in price setting, in the world of luxury, perceived value truly reigns supreme**. Consumers are not just buying a product but an experience, a story, and a status symbol.
For example, a handbag might have a production cost of €1,000, but if it conveys status and is associated with the elite, its price can skyrocket to €30,000.

2. Penetration Strategies vs. Skimming

Within the broad spectrum of pricing strategies, two in particular take centre stage in different markets: penetration strategy and skimming. But in the luxury realm, the latter is the undisputed champion.
Penetration Strategy: This strategy is based on setting low prices for new products aiming to quickly attract a large consumer base and capture a significant market share. Once this segment is captured, prices can be gradually increased. This tactic is common in mass and competitive markets, where speed in capturing market share is essential.

Skimming Strategy: Skimming, on the other hand, is the tactic of choice for luxury brands. Here, products are introduced to the market at a high price from the get-go. This strategy targets consumers willing to pay a premium for being the first to own the product or for the perceived value it represents. The benefits of this tactic include:

• Maximising Initial Profits: By targeting consumers willing to pay more, brands can gain significant profit margins right from the product launch.
• Brand Positioning: By setting high prices, brands send a clear message to the market about their product’s exclusivity and superior quality, reinforcing their positioning as leaders in the luxury segment.
• Demand Control: By maintaining high prices, brands can manage demand, ensuring they don’t exceed their production capacity, especially if the product requires detailed artisan craftsmanship.
• Protection Against Competitors: A high entry barrier in terms of price can deter potential competitors, ensuring the brand retains its exclusive market status.

However, it’s **vital for brands choosing the skimming strategy to ensure their products meet the high-quality and exclusivity expectations their price suggests**. In the world of luxury, the balance between value and cost is delicate and crucial to maintain consumer trust and loyalty.

3. Few Discounts and Promotions

Sales and promotions are common tactics in many markets to boost sales, clear stock or attract new customers. However, **in the luxury realm, these strategies are handled with extreme caution**. Offering discounts can have **significant repercussions on a brand’s perceived value and exclusivity**.
The Risk of Discounts: Frequent or widely advertised sales can give the impression that a product is overpriced or hasn’t been well-received by the market. This perception can erode the brand’s exclusive image and reduce its long-term appeal.

Exclusive Promotions: Instead of open sales, luxury brands often offer highly selective promotions or exclusive experiences to their most loyal customers. These might include early access to new collections, VIP events or bespoke services. Such tactics reinforce the relationship between the brand and the client without devaluing the product.

Private Sales: Some brands opt for private or “secret” sales to clear stock without advertising discounts to the general public. These sales are typically by invitation and conducted in controlled environments, allowing brands to maintain an image of exclusivity while managing their inventory.

Strategic Communication: If a luxury brand decides to offer a discount, how it’s communicated is crucial. Instead of focusing on the reduced price, communication might focus on the offer’s exclusivity, the brand’s story, or product quality.

Added Value: Instead of slashing prices, many luxury brands choose to add value to the purchase. This could manifest in premium packaging, personalised engravings, extended warranties or exclusive after-sales services.

Therefore, while promotions and discounts are valuable tools in the retail world, in the luxury sector their use must be measured and strategic. The key lies in balancing the need to drive sales and manage stock with the paramount requirement of maintaining the brand’s perceived value and exclusivity.

4. Geographical Adaptation

The luxury world is not immune to the fluctuations and specificities of local markets. In fact, one of the most distinguishing features of luxury brands is their ability to adapt and respond to specific geographical conditions while maintaining their global identity.
Regional Price Differences: It’s common for a luxury product to have varying prices depending on the region or country. These variations might be due to factors like taxes, import tariffs, operational costs, and of course, local demand.

Taxes and Tariffs: Some countries levy high taxes and tariffs on imported luxury goods. These added costs usually get passed onto the consumer, resulting in higher prices compared to regions with lower levies.

Operational Costs: In cities where retail space rentals are sky-high, or the cost of living is particularly elevated, luxury product prices are likely to reflect these additional expenses.

Local Demand: In areas where the demand for luxury goods is especially high, brands might adjust their prices upwards. This phenomenon often occurs in emerging markets or cities renowned for their penchant for luxury.

Avoiding Arbitrage: A concern for luxury brands is “grey market arbitrage,” which refers to buying products in a market where they are cheaper and then reselling them in a pricier one. To combat this, brands must be cautious when setting their prices, ensuring differences aren’t large enough to incentivise this practice.

Culture and Perception: Value perceptions and preferences can vastly differ across cultures. What’s deemed exceedingly valuable or desirable in one region might not hold the same allure in another. Luxury brands often delve deep into cultural nuances before setting their pricing strategies in a new market.

In essence, geographical adaptation is a delicate dance for luxury brands. While globalisation has bridged consumers worldwide, local quirks and economic conditions still play a crucial role in price determination. Successful brands are those that strike a balance between their global identity and keen local sensitivity.

5. The Role of Brand Experience

Luxury isn’t just about tangible products; it’s also about the experience surrounding those products. Often, consumers are willing to pay a premium not only for a high-quality item but also for the brand experience accompanying it.
Physical Retail Points: Luxury shops are usually more than mere retail establishments. They are carefully crafted spaces that convey the brand’s essence, from architecture to the smallest decor detail. Such shops often deliver sensory experiences, using music, lighting, and fragrances to create a distinctive ambience.

Personalised Attention: Customer service in the luxury realm goes beyond the ordinary. Customers anticipate, and usually receive, personalised attention. This might manifest as sales advisors familiar with the client’s preferences and purchase history, product personalisation services, or even VIP experiences for loyal patrons.

Exclusive Events: Luxury brands frequently host exclusive events, ranging from fashion shows to product launches and private soirees. These events not only showcase new products but also strengthen the brand-client relationship.

Direct and Personalised Communication: Leveraging digital mediums and social networks, luxury brands have found ways to communicate directly with their customers, offering exclusive content, collection previews, or tailored services through digital platforms.

Packaging and Presentation: A luxury product often comes with packaging reflecting the item’s quality and exclusivity. This packaging not only protects the item but also enhances the unboxing experience, making it memorable.

After-sales and Additional Services: The relationship between the client and brand doesn’t end post-purchase. Luxury brands typically offer exceptional after-sales services, be it in the form of extended warranties, complimentary maintenance, or exclusive loyalty programmes.

Thus, in the luxury universe, the product is just one part of the equation. The full brand experience, spanning from the initial customer contact to long after the purchase, plays a crucial role in value perception and consequently, in price setting. Successful brands grasp and capitalise on this holistic customer interaction.

6. Production Limitation and Artificial Scarcity

In the luxury realm, rarity and exclusivity often equate to value. Being aware of this phenomenon, luxury brands sometimes deliberately limit the production of certain items, fostering a sense of scarcity, which boosts their appeal and consequently, their price.

Limited Editions: Luxury brands frequently release limited editions of specific products, be it watches, handbags, or apparel. Produced in reduced quantities, these items instantly become coveted by brand aficionados and collectors.

Temporal Releases: Some products might only be available for a specific timeframe, after which they’re pulled from the market, instilling a sense of urgency among consumers to acquire the product before it’s gone.

Controlled Transparency: While scarcity can heighten desire, brands must be transparent about the reasons behind limitations. This could be due to material rarity, manufacturing intricacy, or a conscious decision to uphold exclusivity.

The Psychology of Scarcity: Perceiving something as limited can trigger a psychological response, amplifying the desire to own it. Individuals often value what’s scarce more, and luxury brands employ this principle to justify heftier prices.

Avoiding Market Saturation: By limiting production, brands also sidestep flooding the market with their goods. An overabundance might diminish an item’s perceived value and erode its “luxury” status.

Risks of Artificial Scarcity: While limitation can boost value, it’s not without risks. Should consumers feel that scarcity is a contrived tactic lacking genuine justification, the brand might face backlash, potentially tarnishing its reputation.

In conclusion, scarcity, whether natural or manufactured, is a potent tool in luxury brands’ repertoire. However, it must be wielded with care and authenticity, balancing the allure of exclusivity with the need to retain customer trust and loyalty.

7. After-sales and Comprehensive Experience

The luxury universe extends beyond the mere act of acquiring a product. Luxury brands recognise that, to justify their lofty prices, they must offer an experience that spans from the moment a customer steps into the store or website, to long after the purchase.
Exclusive After-sales Services: Upon acquiring a luxury item, clients expect a service level befitting their investment. This might appear as complimentary maintenance services, extended warranties, specialised repairs, or even upgrade programmes allowing clients to refresh or enhance their item.

Premium Packaging: A luxury item isn’t merely delivered in a box. Its presentation and packaging are brand extensions and should reflect the product’s meticulous attention to detail and quality. From high-end materials to finely crafted details, packaging becomes an experience in its own right.

Ongoing Customer Relationship: Luxury brands aim to foster long-term relationships with their clients. This might involve personalised communications, invites to exclusive events, or early access to new launches. This ongoing rapport encourages loyalty, ensuring clients return time and time again.

Specialised Staff Training: To ensure an unmatched customer experience, luxury brand personnel often undergo specialised training. They must not only have in-depth product knowledge but also comprehend the expectations and needs of a luxury clientele, poised to offer advice and support whenever needed.

Digital Presence: With the digital realm becoming ever more integral to luxury retail, brands must provide a seamless online experience, mirroring their physical touchpoints. This might involve exclusive online content, personalised recommendations, or even virtual try-on services.

Storytelling and Heritage: A luxury brand’s story and heritage often play a pivotal role in the overall experience. By intertwining product narratives with brand history, luxury entities instil a deeper emotional connection with the consumer, fostering appreciation and loyalty.

By offering a holistic experience that transcends the mere acquisition of a product, luxury brands solidify their position in the market and bolster the justification for their price points. This all-encompassing approach not only ensures product desirability but also cultivates a bond between the brand and its clientele, a relationship often lasting lifetimes.

Conclusion

In the intricate ballet of luxury pricing, myriad factors come into play. From brand identity and heritage to geographical nuances and the intricacies of scarcity, each component contributes to the final price tag. At the heart of this strategy lies the commitment to offering unparalleled quality, experiences, and emotional connections, all of which together define the essence of luxury.