Price Tag or Tug of War
While the luxury prices are increasing I can't but wonder what's the reason behind it.
I recently ended up in a forum where the conversation was around yet another pricing increase in luxury products. They were specifically mentioning the price of the small puzzle bag by Loewe, which went up by $300, just at the end of 2023. Not an irrational move, considering that Loewe is stack on the top 3 brands of 2023. It was definitely not a surprising topic to me but it made me think that we hear about the price increases of luxury products more often than on the past. According to New York Times, the auction house Sotheby’s found a classic 2.55 Chanel bag sold for around $1,650 in 2008. In 2023, that figure from Chanel is closer to $10,200. I will spare you from calculating, we are talking about a more than 500% increase of the price in 15 years. However, luxury brands just saw one of the best years financially and they are suppose to grow higher according to BoF predictions for 2024.
On my effort to understand the pricing techniques and how it influences the market, I have read hundreds of articles and to be honest this piece took way longer than what I thought it will because I originally started thinking about it last August! I will split the price increase reasons in categories, since the articles I’ve been consuming since August have way too different point of views, without one of them being wrong or right per se.
The Essence of Luxury
The first category is the essence of luxury and how price tags defines ones status. Luxury brands like Prada, Loro Piana, and Rolex epitomise exclusivity, offering unparalleled quality, status recognition, and memorable experiences. This distinction requires a deep understanding of consumer desires and the psychology behind exceptional experiences. Price plays a critical role in shaping brand perceptions, where higher prices often signal superior quality, prestige, and uniqueness, thus reinforcing brand desirability.
The biggest price increase of Chanel bags came on a tug of war moment between Chanel and Hermes with the latter always having the highest spot on the podium of luxury. Chanel decided to redefine their position in luxury market by climbing on the pricing ladder of luxury brands. However, when you increase your prices by 500% customers expect a similar quality increase. As a result Chanel was put under the microscope of the consumers looking for the smallest default and drag Chanel all over the internet.
Empirical Insights on Price Display in Luxury Marketing
Similarly with the first point and contrary to traditional beliefs, empirical evidence suggests that displaying prices for premium luxury brands can positively influence consumer perceptions of brand uniqueness and conspicuousness, which may enhance brand attitude and desirability. This finding, challenges common wisdom and highlights the importance of transparent pricing strategies in luxury brand management.
This information came to me from a post of a Greek creator (shoutout to Margarita Gourgourini) and her post about the prices in luxury market. In case you don’t speak Greek, I can translate for you: Daniel Kahneman an Israeli-American author and Psychologist aka The Father of Behavioural Science did, among others, the cashmere sweater experiment. In this experiment they asked people to pick between two identical cashmere sweaters with a huge price difference between them. They all picked the most expensive one and that’s the behaviour that pricing specialists are based upon.
Articles from sources like FT and New York Times discuss the casualisation trend in luxury fashion, where luxury items increasingly resemble casual clothes they imitate. This trend underscores the reliance on price alone to differentiate luxury items, highlighting the contradictions between casualisation and the imperative to differentiate with price.
Witness, for example, the leisure sneaker phenomenon: you can buy a $1,000-ish pair from Loro Piana, or Louis Vuitton, or The Row, or Brunello Cucinelli, or Zegna. Beside their prices, what they all have in common is that they are not better looking, more refined, more comfortable or sturdier than a nice pair of Nike’s that will set you back less than $100 (manufacturing technology has driven the real cost of good sneakers down dramatically in recent years). The luxury sneakers do, however, successfully signal to a select group of people that you are rich.Impacts of Geopolitical Events and COVID-19
The luxury fashion sector has navigated challenges posed by geopolitical events, such as the war in Ukraine, and the COVID-19 pandemic. These events have led to supply chain disruptions, increased operational costs, and shifts in consumer spending behaviors, necessitating strategic adjustments in luxury fashion pricing and marketing strategies.
And we wouldn’t expect luxury brands to be immune to inflation. Increased production costs and fluctuating income levels may lead luxury retailers to increase prices to maintain profitability. However, consumer resistance to perceived unfair price rises suggests a potential limit to price increases for luxury goods, indicating a need for strategic pricing adjustments. This resistance will be more obvious during 2024, where we expect a ~25% price increase in luxury products while the inflation and the housing problem has become an everyday stress for most of the people.
Apart from the geopolitical situation the ecological aspects are also influencing the consumers behaviours. Consumers are increasingly oriented towards sustainable fashion product consumption. Luxury brands are encouraged to develop and stage memorable consumer-centered experiences that promote sustainability, affecting price positioning as a result of the added value of sustainable practices (Han, Seo, & Ko, 2017).
Strategic Pricing and Marketing Recommendations for Luxury Brands
Luxury brands can adopt several strategies to enhance brand perception and navigate market challenges, including setting premium price points, value-based pricing, limited editions for exclusivity, premium brand extensions, consistent brand experience, and premium customer service. These strategies can help brands maintain a premium image and attract consumers who value quality and exclusivity.
Take as example Hermes again. Hermes has a lifelong customer care for their leather goods, meaning that if you ever buy an Hermes bag you can maintain it directly in an Hermes flagship store for all its life.
In conclusion, the luxury fashion industry's dynamics are influenced by a complex interplay of consumer psychology, market trends, geopolitical events, and economic factors. The reason I was very interested in this topic was mainly because I was listening a lot of biases from each point of view and I wanted to kind of break through them.