Luxury Interactive reveals online luxe race

Fashion_20_race

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.

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7 comments

  1. Wow, great interview. Very insightful. It made me really think of the power of social networking sites and how all kinds of industries and brands are popping up on them. I regularly use MySpace and Facebook and I have noticed the increased prevalence of advertising for all kinds of products ranging from movies to shampoo. I just finished a marketing plan project for a class and I had briefly discussed the power of social networking sites. Wish I had this post to use in my discussion!

    katlin from Corvallis, OR, United States
  2. Interesting – but what nobody seems to be asking is what impact direct online selling by luxury brands will have on offline retail, particularly in multi-brand stores. If a company such as YSL for example can get full retail price for something in both its offline stores and via ysl.com, surely this will impact on to whom it sells wholesale. No third party retailer, online or off, is going to be able to carry as broad a range as the company’s own store or website.

    Caricouture from Dublin, County Dublin, Ireland
  3. Thanks for another great post… It’s important that marketers don’t see social networks as just another place to advertise. They need to enable conversations about their brands and products in a way that empowers consumers to participate in new experiences. If they do it right, consumers will market to each other.

  4. There are parts of this I’m skeptical of. Mainly, I’m not sure what the prospects are for an ‘in-brand’ network; supposedly it’s worked for cars, but cars are very different from fashion because they demand so much more from their owners in terms of maintenance, being very complicated, beautiful machines. This model wouldn’t apply to fashion. I don’t know how keen consumers would be to frequent an online community in which the main thing they have in common with each other is owning Louis Vuitton bags. I think the most interesting consequence of Web 2.0 will be in the realm of real-world retail. I don’t think flagship stores and boutiques will disappear, but the emphasis will shift from selling, first and foremost, to promoting the brand’s image with selling as a second priority. We’ve been hearing for a long time that shopping needs to be made more exciting, a more unique experience. In the future I think actual stores will come to be advertisements for goods which can then be bought online. At the same time, this will create room for truly unique shops to capitalize on the pleasures of the offline shopping experience by making that experience even more interesting and personal. So this creates lots of new opportunities both online and off. I want to make myself clear: I’m not a technophobic crank. I’m writing this from the heart of Silicon Valley. But I’ve seen a lot of very interesting ideas which were supposed to be the future of the web or social networking crash because talk is cheap and promising ideas often don’t work out. So, the prospects for a new marriage of fashion and the internet are very exciting, this blog not least among them, but one thing at a time.

    Anjo from Stanford, CA, United States
  5. @Anjo: Thank you for your insightful comments. You’re right — the model for an in-brand luxury network has yet to be ironed out. And, in the words of Seth Godin, the last thing a luxury customer wants is a meatball sundae (look up his book of the same name to see what we’re getting at). That said, if certain brands are able to create an online environment which speaks to the heart of the brand (and not only to their products), there may indeed be people who want to affiliate themselves with a branded network, particularly if the community provides them with something they value and cannot find elsewhere. We’ll see how it all works out, but one thing is for sure. In brand communities will only make sense if they bring something new to the table — not just a place to talk about products. There are already plenty of places on the Internet like that. As for your thoughts regarding real world retail, you are right on the mark, in our view. Stores may indeed become more about the luxury brand’s experience. Already we are seeing brands make an effort to make the in-store experience truly unique. We may see, for example, more services such as spas, restaurants and concierges as part of the in-store experience.

  6. Thanks for your kind words, BoF, and a final comment about the continuing development of offline retail. You mentioned spas, restaurants and concierge services, all of which are well and good, but not, I think, terribly new, or a real counterbalance to the development of online retail. You can combine two previously separate services (shopping + spa) and it is more convenient but it isn’t revolutionary. Obviously there are elements of seasonality in every store- the window displays, for example. Imagine a store that is redone every six months to reflect in every way the designer’s vision for that season, probably based on his runway shows. This store would be less a place for commerce than someplace people would come to fully inhabit that brand’s world, which would of course translate into a desire for product. Think about it as an extension of the photographic ad campaign, but instead of a simple image in a magazine into which the viewer can project him or herself, imagine an entire space that fulfills the same concept. Maybe with concierge service. Like I said, some parts of this are already in practice, and obviously brands take care that their retail spaces closely reflect their brand image. But this would be a fundamental shift: instead of prettying up the retail space so it can move product more effectively, the retail space would be a statement of brand identity in its own right, an advertisement you can walk into, with the vast majority of business taking place online. Anyway, just an idea, a madcap projection of the future. One among many I’m sure.

    Anjo from Stanford, CA, United States