Successful luxury brands can generate extraordinarily high margins because they serve a deep psychological need. They are not just selling clothes or even handbags; they are selling identity. Consumers buy luxury goods products because they feel they are elevating themselves by owning something which is special and exclusive. The psychology goes something like this: “I would like to be an elegant Parisian lady (unfortunately, I am not). But when I buy a new Chanel handbag I (briefly) become one (in my mind, and in the eyes of those who see me).”
I have, therefore I am. Luxury goods resolve people’s insecurities about who they are and their place in society. (This is why they are particularly important for nouveaux riches, who have only recently attained higher status and are less confident about their social worth). Luxury products help to set us apart from the crowd and make us special in our eyes and in the eyes of our peers.
And yet, in truth, the vast majority of luxury goods are anything but exclusive. If they were, luxury would not be a global business selling to a consumer market of millions.
How, then, have major luxury brands got away with selling “exclusivity” while moving millions of units? How have these brands become so big, and yet managed to hide their size in plain sight, so that people continue to see their products as exclusive and desirable?
Here’s are their top 10 strategies:
1. Price Discipline
Keeping a tight grip on pricing and avoiding discounts is critical. Here’s how it works. Modern luxury brands try to convince consumers that they sell precious products, not expensive products. When one goes to a Louis Vuitton or Chanel store and asks a sales assistant about the price of a product on display, the answer is invariably about the value of the product. We know that price and value are clearly not the same thing, especially when starting gross margin is close to 90 percent. Yet, if a brand never discounts, consumers can’t easily see this reality and will create, over time, a mental equation between price and value. That is very desirable for luxury brands, as it is clearly more advantageous and sustainable to be seen to sell precious goods rather than expensive goods. If brands discount, on the other hand, consumers will know that when they pay full price, they are paying too much. Hence why top luxury brands never go on sale.
2. Price Balance
Successful luxury brands earn the right to offer low entry price points by simultaneously stretching prices for other goods upwards. Being recognised as high-end allows brands to push entry price points further down, while defusing the risk of brand trivialisation. This is most obvious when couture brands, such as Chanel and Dior, sell beauty products.
The fact that consumers can find Chanel and Dior beauty products in tens of thousands stores all around the world and buy a lipstick for less than €50 doesn’t reduce the allure of these brands, which largely comes from their anchor in significantly more expensive categories. Moving at the same time upwards and downwards provides brand equity insurance. This is the reason why, for example, when Chanel and Louis Vuitton entered the entry price jewellery market, they simultaneously moved to create a beachhead in the high jewellery market.
3. Entry Price Icon Rarity
Some luxury goods brands choose to constrain the volumes they sell of the entry price point versions of their product icons. This is clearly the case when we look at some of the best watch brands. Rolex sells as many Datejust steel watches as the market will possibly take. But when it comes to selling the steel versions of its product icons, such as the Daytona Panda, the Submariner Hulk or the GMT Pepsi, it is a completely different story: they are very difficult to find, because Rolex deliberately produces and sells less than the market would take.
Confronted with long waiting lists, the average consumer develops the idea that Rolex is a very exclusive brand, never mind that they sell one million watches every year. In fact, the impact is a triple whammy positive: a) consumers that can move up to higher priced and higher margin precious metal versions; b) consumers that cannot, buy second-hand entry versions, supporting resale value and reassuring current owners; c) other consumers branch out and try other Rolex models, contributing to creating new icons over time. Hermès does something very similar with its Birkin: the plain vanilla leather version is tough to find, but the diamond clasp alligator version was immediately available during recent store checks.
4. Volume Restraint
Luxury brands have chosen to sell lower volumes of their most commercial products than the market would take. Consider Louis Vuitton’s decision to limit the volume of the collection it developed with Supreme, which was sold by invitation only, exclusively to Louis Vuitton’s VICs (very important customers). VICs had to come to a designated store at a specific time to have the privilege to buy a maximum of one single product. It is not surprising to see these products today selling at a multiple of their original retail price, as they have become coveted collectors’ items. In a similar vein, Dior decided to limit to 40,000 pieces of its “Je suis feministe” T-shirt. This seems designed to avoid flooding the market with what would be very popular and commercially successful products, defusing the risk of ubiquity perception and potential brand trivialisation.
5. Exponential Price-Quality Trade-Off
Much of modern luxury’s appeal is built on providing objectively better quality versus the common product, but at an exponentially higher price. This is the same principle that supports diamond pricing: a slightly better grade costs a significantly higher amount of money, following an exponential relationship between quality and price. Higher perceptible quality also serves as an anchor for consumers to pseudo-rationalise spending a materially higher price than the voice of reason would suggest.
Much of modern luxury’s appeal is built on providing objectively better quality, but at an exponentially higher price.
“This handbag is expensive, but its leather is softer than any other handbag out there,” we heard from a happy Bottega Veneta consumer. “This handbag is expensive, but its stitching is perfect and a masterpiece in its own right,” we heard from a happy Hermès consumer. “This handbag is expensive, but I love the monogrammed leather,” we heard from a happy Louis Vuitton consumer, who thought that the body of a canvas monogram handbag was indeed made of leather. “I paid so much for this handbag, that I thought this was of course made of leather; I am so disappointed to learn otherwise,” she added (as if leather was a precious material).
6. Category Segregation
A number of successful modern luxury brands confine their original core category products to a high price range, making them unattainable to most. But they open up entry price points to a much larger middle-class constituency using different product categories. A good example of this approach comes from couture brands, such as Chanel and Dior. Their evening dresses, which represent their quintessential brand DNA, remain very expensive, but they use beauty to expand their reach to much larger audiences than the few who can afford their high-end fashion.
Brands which have their core DNA in higher priced product categories typically travel across categories more comfortably, because it is always easier to descend than to ascend. It is easier for a couture brand to expand into handbags, for example, which in absolute terms cost a fraction of their evening dresses. It is very difficult for a brand with a lower price anchor, such as a footwear brand, to expand into handbags, however, because in this case consumers would have to trust the brand in a much higher average price product category.
7. Style Proliferation
Well-managed modern luxury brands avoid the perception of ubiquity by multiplying the styles they sell, as they grow larger. The impression that a brand is ubiquitous comes first and foremost through product identification. If everyone is wearing the same jacket, then this jacket no longer serves the purpose of setting people apart and making them feel special. But if brand X is selling many different styles, then the impression that you have something unique can still be sustained. Moncler is a great example of this. It would have been easy for this brand to sell the same blue jacket over and over. But they saw early on this potential problem coming and went to great lengths to avoid style commoditisation to the point of not showing in store more than three identical products side by side and made sure the product pipeline was always rich and diverse.
8. Shock & Awe
A number of modern luxury brands secure their high-end perception by focusing their advertising on some of their most expensive styles. Cartier is a good example of this, and a sharp contrast to some of the Tiffany communications of the past. A typical Cartier jewellery piece in the Financial Times would have 50 carats of diamonds. One would be in awe of such a brand, and perhaps even be reluctant to enter a store. But inside one would be happy to find that, actually, there is still a way to buy something one can afford from such an impossibly high-end brand. Best in class brands let consumers discover they are actually more accessible than they thought once they are in the store, not before then.
Other brands extend this shock and awe strategy to their in-store experience, with sales assistants behaving in a borderline haughty manner. Academic research has shown this is conducive to higher sales effectiveness, apparently. It is a common experience that sales assistants “measure up” potential customers: if you go dressed up (and with a competitor brand), they will be very friendly. If you appear casually dressed, they will be less so. But this may prove to be a shortcoming, not a best practice.
9. Touchpoints Excellence
A number of brands strive to provide a wonderful consumer experience along all key touchpoints with the idea that an excellent frame will make the painting look nicer. The majesty and beauty of a flagship store, for example, will reverberate on what consumers think of the brand. But dropping the ball just once during the interaction with consumers could kill the magic. The wrong word, the wrong attitude, a bad online experience, a dirty floor, will undermine the perceived exclusivity of the brand. This is similar to people who are in love. When you are in love with someone, you think everything they do and say is magnificent, unless they do or say something very wrong, and you suddenly wake up and see everything in a different light.
10. Distribution Grip
Of course, a precondition to excellent execution across key consumer touchpoints is having a direct and tight grip on distribution. Best in class brands will have therefore extreme control over the shopping environment, physical or digital, and will be best positioned to influence perception effectively. The bigger the brand, the tighter the control, as the risk of trivialisation increases.
Luca Solca is head of luxury goods research at Bernstein.