Luxury Pricing

Lessons From Luxury #6: Obtain and Retain Pricing Power

The allure of luxury extends far beyond the tangible. Luxury brands not only create strong customer and employee loyalty but also command premium pricing, yielding substantial profit margins. The question of course becomes: what if these principles could be adapted by businesses beyond the luxury sphere? Can businesses harness the power inherent int luxury pricing strategies?

 

Pricing and Competition

Prof. Philip Kotters famous 4 P’s of marketing still hold: Product, Price, Place and Promotion are still key in defining a value proposition, answering questions such as how to differentiate, where and how to sell and how to win customers.

But what about how much to charge? General marketing theory abounds on pricing strategies: cost-plus, value-based, competitive, skimming, etc. Perhaps “psychological” pricing is the closest formal pricing strategy to how luxury pricing works – yet it still sits far apart. Sure, luxury companies apply conventional pricing strategies too, but only at lower price points where rationality reigns high. To really glean meaningful insights from luxury pricing, we need to look at the irrational side of how luxury pricing works.

Most consumers (and businesses) do not buy mainly because of the lowest price. Competing on price is not as effective as people assume. Or in the words of Prof. Malcolm McDonald: “all the research I’ve done on every continent in the world for all the big companies, I’ve never found any market anywhere in the world where the price segment is greater than 10%.”[1]

Clients are willing to pay more for branded products and services. A brand differentiates something or someone from its competition, instils trust, simplifies choice by reducing risk, stimulates demand, creates pricing power and – all being well – builds loyalty and creates value over time.

 

“Price is what you pay. Value is what you get.”

Warren Buffet

 

Value creation happens beyond utility. For example, beyond the need to go from A to B on four wheels in downtown, the intangible factors of doing so in a Ferrari emphasizes on benefits like prestige, status or satisfaction to increase the product's worth in the consumer's eyes. By aligning prices with customer perception, businesses can capture more value, focusing on both the utility and the broader value a product or service offers beyond its basic functionality.

 

How Luxury Gets Pricing Right

Dr. Johann Rupert, chairman of the Swiss luxury conglomerate Richemont, explains pricing power as follows: “Our role is to protect the DNA and the brand equity, because if we can have desirability and brand equity then we can have pricing power.”

Pricing then becomes a positioning tool. It doesn’t just inform about the price. It communicates a message about your brand’s perception and so it influences the decision-making of the buyer. In ultra-Luxury, traditional economic price elasticity does not influence the price-setting. In fact, it it’s quite the opposite. Increasing the price-point stimulates more demand. Thorstein Veblen was one of the first sociologists to analyze luxury goods in the social economic context in his reputed theory of the leisure class. The “leisure class “is in an exclusive circle that has the luxury to go beyond function, necessity and utility in their lifestyles”.

 

Veblen

 

Superlative pricing strategies create a halo effect that elevates the brand's allure. Consider Hublot's “Five Million” watch adorned with over 1200 diamonds (and yes it costs $5 million). This is not about a timepiece, it's about a statement that creates a pull for the brand at much larger scale - because Hublot also offers more accessible watches starting at $5,000.

 

“Sometimes the product is not expensive enough.”

Dr. Clotaire Rapaille

 

This approach cleverly sets a relative price point, making luxury more attainable and creating a pricing ladder within the brand. In luxury markets, it's not just about setting high prices but also about offering "superhero" products in limited quantities. Deliberately created exclusivity creates desire. Good luck trying to purchase a Hermès Birkin bag for $100’000 on short notice – it’s a perfect illustration of “the higher the price and the rarer the item, the greater the desire”.

Adrienne Klassa recently wrote in her FT article that “the average price of luxury goods tracked by HSBC has increased by 50% since 2019. Some increases have been more aggressive than others: the price of Louis Vuitton Speedy bag models in France has doubled to €1,600 in that period, while a large Chanel flap bag is more than 80% more expensive at €10,500.”[2] The significantly higher pricing is justified by exclusivity and perceived value.

 

“Luxury sets the price; price does not set luxury.”

 Jean-Noël Kapferer

 

Beyond utility value lies the emotional and symbolic appeal that luxury brands masterfully weave into their narratives. Omega doesn't just sell watches; it offers a piece of history with its timepieces that have been to the moon. Panerai doesn't just craft watches; it invites you to embody the precision and rigor of a Navy Seal. Ferrari’s allure isn’t solely in its speed but also in the prestige of Formula 1 victory. These brands extend an invitation to not just own a product but to inherit a legacy or personify an icon be it the timeless charm of Marilyn Monroe or the sophisticated allure of sipping coffee like George Clooney. This state of non-utility traits, deeply embedded in a brand’s DNA, transcends the boundaries of rationality and taps into the emotions and aspirations that influence purchasing decisions in both B2B and B2C markets. By integrating these stories, brands elevate their offerings and guide consumers up the value ladder, where emotional engagement becomes as significant as the product itself.

 

Pricing Power for Non-Luxury Brands

If you do not have a superlative product that can command irrational pricing power, think about creating one. Even if you don’t sell much in a stratospheric pricing point, it will create curiosity, deliberate distance from your ‘normal pricing’ on products and services - and consequently, and when executed carefully, will command stronger pricing power further down the product ladder. Think about it this way: Porsche may not sell many 911 S/T at nearly 400'000 USD (nor will it want to, for reasons of exclusivity), but it will it make the Macan at 60’000 USD a lot more attractive – and here the volume will be x fold.

“Why do we pay twice as much for a Red Bull as for a can of Coke? Because the Red Bull is in a smaller can. It makes us think, ‘It must be worth paying for.’ But logic won’t tell you this and research won’t tell you this. It’s behavioral economics that fills in this third piece.”[3] Nespresso is another good example. It is a non-luxury coffee brand, adopts premium pricing for its machines and capsules, positioning itself as a high-quality coffee experience brand, attracting coffee connoisseurs.

Non Lux

In their book called Trade Up, Silverstein and Fiske discuss extensively about brands like Victoria’s Secret, Callaway or Belvedere Vodka which have been ‘trading up’ from start in growing markets. In the US even budget brands like Dollar Tree and WalMart shared plans to target higher-income customers.[4] In Switzerland, the supermarket chains Migros and Coop effectively use their premium brands, Sélection and Fine Food respectively, to target upscale market segments through strategic pricing and product differentiation.

Non-luxury brands can learn to justify higher price points by enhancing product quality, offering exclusivity, or providing exceptional customer experiences and services. Like luxury brands, you can base your prices on the perceived value of your products rather than production costs. Maybe not on everything, but on a ‘halo on your terms’. In other words, you can start leveraging your brand positioning and price your products upwards.

 

Five Ways to Obtain Pricing Power

Here are five key ways in which businesses can leverage luxury pricing strategies to their advantage:

Create Perceived Exclusivity: By offering products that are perceived as exclusive or scarce, you can command higher prices. What is your Halo offering? Limited edition items or services that offer a unique expertise or experience can increase desire and willingness to pay premium prices.

  • Create Perceived Exclusivity: By offering products that are perceived as exclusive or scarce, you can command higher prices. What is your Halo offering? Limited edition items or services that offer a unique expertise or experience can increase desire and willingness to pay premium prices.
  • Enhance Brand Prestige: Building a strong, prestigious brand image is crucial. Associating your brand, sub-brand or a specific product/segment with high-status, personalities etc. can help elevate your standing and justify higher pricing.
  • Emotional Engagement: Connect with customers on an emotional level by telling compelling stories about your brand and products. Emotion is near impossible to price, adding intangible value increase the willingness to pay a premium.
  • Use Price to Signal Value: Luxury pricing doesn’t follow conventional cost-plus methods but reflect the brand’s exclusivity and allure. Set prices that not only cover costs but also signal high value to your audiences.
  • Focus on Exceptional Quality and Service: Ensuring that your product or service is of exceptional quality can support higher price points. Think of using superior materials, add humane elements where applicable, as well as delivering outstanding customer service beyond pure function.

In summary: think beyond pure utility pricing strategies. Looking beyond the glitz and glamour of luxury delivers golden insights that can sprinkle some of that high-end sparkle on your own offerings too!

___

[1] McDonald, Malcolm. “Market Segmentation - Oxford College of Marketing.” YouTube, 17 May 2013, www.youtube.com/watch?v=3Gc8nK3F0Us.

[2] Champagne Era for Luxury Industry Prices Starts to Go Flat, Financial Times, www.ft.com/content/12dba1bf-1e2e-468a-aece-dffcc55d5c30. Accessed 1 Apr. 2024.

[3] Myers, Courtney Boyd. “Ogilvy’s Rory Sutherland on Understanding Human Behavior in the Digital Age.” TNW | Socialmedia, 7 June 2011, thenextweb.com/news/ogilvys-rory-sutherland-on-understanding-human-behavior-in-the-digital-age.

[4] Now’s the Time for Budget Brands to Target Luxury Shoppers, www.inc.com/sydney-sladovnik/nows-time-for-budget-brands-to-target-luxury-shoppers.html. Accessed 1 Apr. 2024.

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