Just digest these figures for a moment:
- Coach’s online business now has revenues of over $100m per year — the same as what Gucci’s new flagship on 5th Avenue is expected to sell. Neiman Marcus has broken the $500m in sales barrier online.
- In the last year alone, wealthy consumers’ use of social networks such as Facebook and MySpace has rocketed from 27% to 60%, a growth rate of more than 120%.
- And, people are snapping up uber-luxe products online — DeBeers regularly sells single diamonds worth more than $25,000 on its ecommerce site and 20ltd.com has sold items worth twice this much.
These were amongst the most interesting tidbits revealed at this week’s Luxury Interactive conference held in London. The eCommerce opportunity has now become abundantly clear. Some quick math would suggest eCommerce is a very profitable channel indeed, especially when compared to a flagship store. The rent alone on the Gucci flagship in New York is estimated to be $23m, when an Internet retail site can still charge a full retail price, but with much lower fixed costs to cover. (However, returns and discounts are higher in the Internet channel.)
As for Web 2.0, finally, we’re beginning to see a shift from a discussion of "if" luxury brands can seize real opportunities for relationship building with their best customers on the Internet, to an exchange on "how" this can be done. Arguably, a brand’s Internet site is now the most important contact point for customers — especially for the customers of the future. One step brands may now take is to set up their own online communities, as we wrote about in a Financial Times article in February.
In the spirit of moving this dialogue along, we caught up with Milton Pedraza, CEO of The Luxury Institute, to better understand the "how" implications of the Luxury Institute’s latest report, "The Wealthy and Web 2.0," which was unveiled at the conference.
BoF: What do you think accounts for the sharp rise in social networking amongst the wealthy set, and how does this impact the landscape for interacting with luxury consumers on the Internet?
MP: The wealthy are highly educated, well-read, tech-savvy and mobile. Most run their own businesses and are self-made, so they have always networked offline and now are doing so, easily, and naturally, online. If they have kids and teens, they have become aware of how efficient and effective online social networking can be, even for frivolous purposes, and want to apply its power to their own social and business objectives. The landscape has changed in that there are significant numbers of wealthy consumers in key social networks now. Indications are that new boutique social networks will begin to be created too. Marketers need to be careful, though, as to how they advertise to, and approach wealthy consumers within social networks. It will mostly be permission-based, and it better be relevant.
BoF: Will social networking amongst wealthy consumers continue to grow at this fast pace?
MP: It may not reach 100%, but online social networking as a tool will become a staple of wealthy consumers, especially as they begin to trust social networks (they will demand control and get it, or exit), and as functionality becomes simpler and easier. This will accelerate the spawning of many specialized communities, some public, some gated, some both, where true affinity conversations can take place. The levels of participation should rival cell phone and pc/internet use. It will become second nature online, because it is second nature offline, and social networks are merely conduits, albeit powerful ones.
BoF: What do you think are the prospects for the mega networks (Myspace, LinkedIn, Facebook) versus specialist niche networks (like aSmallworld)?
MP: The mega networks will most-likely experience a great deal of sub-segmentation within their boundaries, as well as maintain the large public conversations. Members will choose where to participate at different times for different needs. And members will find ways to include and exclude other members, and topics, and social networks will oblige. Just like in any other business category, social network brands will have to decide with great clarity what they stand for, whom they serve, for what purposes, etc…It will be a déjà vu of what luxury brands are going through in terms of defining if they are unique and exclusive or mass brands. The middle ground is a commodity and irrelevant in social networks. Relevancy will be everything in social networks, and it is based on who is a member, and how much relevancy they create in the conversations. Some people will be willing to pay for advertising-free and truly vetted, highly relevant social networks.
Finally, I think the ultimate niche network is a brand’s own community of clients and prospects. This will become common practice in the coming years. Brands will have special networks for all kinds of constituencies.
BoF: Walk us through how, in an ideal world, a luxury brand can take advantage of the rise in social networking amongst the affluent?
MP: We believe that online social networks are based on the same exact success elements of any offline social network. Relevancy, trust and friendly social protocol are key. The amplification effect is dramatic, and the connections are now boundary-less, but same the human principles apply. The simplest thing brands can do is to communicate via advertising on social networks, but consequences for being overly intrusive, dishonest, offensive, unfriendly, or irrelevant apply as much as in any other medium. Brands can create pages or profiles and make it enticing (promos and contests) for consumers to opt in, but once they are in it better be worthwhile. Recommendations from peers, or highly trusted, unbiased experts, are most effective, but if brands try to “manipulate” the conversation with “buzz-marketing” within communities, the result may be lack of trust, even if a product or service is worthwhile. We believe that luxury brands that are trustworthy experts and deliver consistently superior quality, are truly unique and exclusive, are used by people whom others admire and respect, and make clients feel special throughout the entire brand experience will not have to pay to generate online “buzz”. Their customers will do it for them for free. The difference is that within online social networks of peers, the voices will be dramatically amplified much more rapidly across boundaries globally. So, our advice to a brand is: deliver great products and great service to customers, and the social networking engine buzz will take care of itself. Fail to deliver, and that will also take care of itself.
Here again, the best way for any brand to leverage social networking is to create its own communities of constituents, internal, and external. There too, brands will only participate in, and not control the conversation. However, talk is cheap anyway. Brands do, however, control their behaviors in terms of offers, quality, service, policies, social responsibility, etc…So, if you are a great luxury provider, everyone will now know due to social network effects and your own online communities. Feedback will be quick and have no lack of clarity. There will be mistakes, controversy, remorse, forgiveness, and redemption, just as in the offline world. It will be a challenging adjustment, and some brands will not survive the transition. But most luxury brands will adapt and be better for it.
BoF: Finally, what surprised you most about the findings from this year’s survey?
MP: I am always amazed at what a difference a year makes when we deal with the online world; which means we are starting to look for leading edge changes and trends now.