Pricing Strategy

Lessons from Luxury Goods Pricing

In this gloomy economy there are pockets of unreal abundance where the sun continues to shine brightly. Consumers are reining in spending as the tightening credit puts pressure on prices of products and services. Yet producers of luxury brands continue to hold the line. And profit. There must be a lesson here for the rest of us. European brands Hermes, and Gucci Tod’s all published earnings that topped or met market expectations on the back of impressive double-digit sales growth in the first half. This performance is striking coming against a strong euro that has hurt many European exporters amid rampant inflation in raw-material costs. And Hermes, whose handbags start at 1200 Euros (US$1750) but fetch up to 50,000 Euros, said there were shortages for certain items, such as crocodile-skin handbags, particularly in Asia. In fact, Chanel, is planning a 20% price increase starting Nov 1, 2008. For context, the Chanel Classic Caviar Jumbo Flap Bag that typically retails for $2850 will go up by $570. Volkswagen-owned, Bentley, is staying away from “forcing sales of new cars up” while demand is low. According to UK’s Society of Motor Manufacturers and Traders, Bentley has sold less than 1400 new cars so far this year, down 23% compared to last year. September was particularly bad, with sales plummeting 48% year-on-year. Despite the slowdown, they are telling their network of dealers to offer used cars at competitive prices as a way of keeping the brand healthy during the downturn. All these brands consistently pursue a luxury pricing strategy, which means high markups and limited availability. For instance, Louis Vuitton commonly shortened to LV competes with Gucci, Versace, Prada and other luxury brands but pricing strategy follows horizontal differentiation. They recognize that different consumers have distinct preferences for lifestyle reasons, brand and product attributes. Since bags are also a crucial product for them in retailing, LV offers different leathers in many styles and colors. They protect their brand fiercely and spend a lot of money and legal effort in going after knock-offs. LV, like most luxury brands, never has sales or discounts even during Christmas time for fear it would devalue the brand. It is amusing to discuss pricing of luxury products and easy to not take the conversation seriously. So what should firms, say industrial manufacturers, do differently? As a Bentley spokesperson remarked and, perhaps, explained for all luxury goods manufacturers, the integrity and exclusivity of the brand are their two most potent assets. For companies that fall easily in the commodity trap, even during economic boom, the lesson is to differentiate and protect your brands. As for consumers who desire luxury but cannot afford it, do what I do, spend a dollar on a Powerball ticket every six months. The chance of hitting the jackpot is certainly greater than the possibility of getting lower prices from some the luxury brands any time soon.