Why Common Pricing Errors Cost Luxury Brands their Future
I remember a recent conversation with a manager of an underperforming luxury brand about what luxury is. She quickly answered, “It’s got to be expensive.” This is the intuitive description many people attribute to luxury. And nothing could be more wrong. And more dangerous.
First, expensive is relative. For someone with 50 million US dollars, purchasing a Lamborghini is a rounding error, for someone else it’s simply an unattainable dream. Hence, the definition of “expensive” is not actionable for a pricing exercise. Second, simply putting a high price tag on a product and hoping that consumers will purchase it, is doomed for failure. And still, many companies do exactly that. They decide to be in the luxury sector, then focus all their efforts on creating a product, which they price within the more expensive items of a category and then launch. What they call “luxury” becomes a financial disaster. We estimate that more than 90% of new brands in the luxury sector fail, and among the existing brands — often wrongly priced — are many “zombie brands.” They are around but struggle to grow. The cash burn of pricing mistakes is in the billions.
And you don’t have to go far to find a host of failed launches. Across all luxury sectors — from fashion to retail, malls, hospitality and private aviation — we get numerous inquiries from brands that share consumer feedback that their brands are seen as “too expensive.” Just being pricey may have worked years ago when markets were less transparent, consumers less savvy, and competition was scarce, but in today’s digital world with highly sophisticated and social media immersed millennial consumers, it is crucial to justify the price point.
But beware! The value of a luxury product is not in its materials or the time it took to create it.
The extreme value of a luxury product is driven by an intangible, yet enormous value component, the ALV (Added Luxury Value). It is an elusive concept that few brands manage well. I focused a significant part of my academic research on decoding luxury, quantifying ALV, identifying key value drivers — to the surprise of many luxury managers, the “product” is not a significant driver of ALV. A high-quality product is important to create emotion and desire, but frankly, quality and craftsmanship are expected. Significant value drivers are beyond the product.