#61 The Luxury business: Part II
Rules of luxury brands: the product, price and distribution strategy
In a world enamored with labels, the term "luxury" has become something of a catch-all, indiscriminately applied to anything that's expensive or has a glossy sheen. However, the real essence of luxury extends far beyond mere cost or aesthetics; it manifests in the nuance of craftsmanship, the allure of exclusivity, and the longevity of brand appeal. Tapping into the world of luxury is not merely a matter of scaling up the qualities that define conventional or even premium brands. It involves navigating an intricate labyrinth of unwritten codes and principles that dictate everything—from product creation to customer interaction and even digital strategy.
In this series, we'll embark on an in-depth exploration of the luxury universe, decoding the enigmatic rules that govern this unique sector. We'll venture beyond the surface similarities that luxury shares with premium markets to reveal the intricate strategies that set it apart.
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In many sectors, strategy is often defined by what you do: launch a new product, expand into a new market, or initiate a marketing campaign. However, in luxury, good strategy is not just about actions but also about restraint. It's not merely what you choose to do; it's also—and perhaps more importantly—what you deliberately choose not to do.
The principles we'll explore in the next 2 posts are often couched in negatives—'do nots' rather than 'dos.' These prohibitions aren't restrictive; instead, they serve as a strategic compass that helps luxury brands navigate the pitfalls and paradoxes that define their unique landscape. For luxury is a realm where action without understanding can dilute brand equity, confound clients, and erode the very pillars of exclusivity and allure that make it special.
With this in mind, let's venture into it, guided by the compass of 'do nots,' as we seek to understand the complex rules and counterintuitive strategies that govern this extraordinary industry.
Part 1: The Essence of Luxury
Luxury exists in its own unique realm, defying conventional marketing wisdom and consumer behavior. While most brands strive to be accessible and relatable, luxury brands bask in their elusiveness. There's an inherent paradox at the heart of luxury: these brands maintain their allure by being out of reach, yet they need to be sufficiently aspirational to encourage potential customers to strive for them. This dichotomy creates a magnetic field that attracts a select clientele while keeping the masses intrigued. It's this enigmatic essence that sets luxury brands apart from others.
Rule 1: Do Not Rely on Positioning: Luxury Stands Alone
In standard business strategy, positioning is key. Brands are taught to identify a unique selling proposition (USP) that sets them apart from competitors. However, in luxury, this rule is turned on its head. Luxury brands don't compare or position themselves against others; they stand as unique entities unto themselves. The concept of "positioning" is irrelevant because each luxury brand embodies its own universe, complete with its own set of rules, aesthetics, and values. The idea is not to be better than the competition but to be incomparable.
Take Hermès, a brand synonymous with timeless elegance and unparalleled craftsmanship. While other brands might focus on how their handbags are using a more durable leather than competitors', Hermès focuses solely on its own narrative. Hermès is not trying to be a "better" version of another luxury brand; it aims to be uniquely Hermès.
By dismissing the idea of positioning, luxury brands like Hermès create a space where they are the only point of reference, crafting an aura of exclusivity and allure that is essential to the essence of luxury.
Part 2: Product Strategy
In conventional business settings, product strategy focuses on perfection, market testing, and customer satisfaction. However, the luxury market takes an almost antithetical approach, challenging these norms. This section will explore cardinal rules that redefine product strategy in luxury branding, each presenting a counterintuitive guideline for developing and maintaining products that are not just high-end, but truly luxurious.
Rule 2: Luxury is Imperfection
In most sectors, the goal is to eliminate flaws to create a 'perfect' product. However, in the luxury industry, flaws can actually be an asset. The idea here is that the minor imperfections in handcrafted items add a unique character, a soul, to the product, emphasizing the human craftsmanship involved.
Consider the Montblanc pens. Each pen is individually crafted, and the slight variations in the details make each piece unique. These 'flaws' or irregularities affirm the brand's commitment to craftsmanship over mass production.
Rule 3: Do Not Bow to Customers' Desires
In most markets, customer preference dictates product design and feature sets. However, luxury brands distinguish themselves by resisting this pull. Instead, they dictate their own vision and invite customers into their world, setting the terms of desire rather than responding to it.
Yes, Apple is considered a tech brand, but it also embodies many characteristics of a luxury brand. For years, it has avoided incorporating features based solely on customer demand (like expandable storage on iPhones). The brand philosophy is built around the vision set forth by its designers and engineers.
Rule 4: Avoid Market Testing
Product testing is a staple in most industries to gauge market reaction. However, luxury brands often forgo this step. The vision of the brand and the creative inspiration behind each product are non-negotiable and not subject to public opinion.
Chanel's iconic No. 5 perfume, created by Coco Chanel and perfumer Ernest Beaux, was never market-tested. Yet, it became one of the best-selling perfumes in the world, exemplifying the power of pure vision over market research.
Rule 5: Do Not Look for Consensus
The objective is to preserve the unique vision that only a singular creative mind can conceive. Creative Director Alessandro Michele's vision for Gucci has been unique, somewhat divisive, and far from consensual. Yet, his unapologetically bold approach has breathed new life into the brand, making it highly desirable among a new generation of consumers.
By breaking these 'common sense' rules, luxury brands set themselves apart in their approach to product strategy, embracing principles that may seem counterintuitive but are foundational to the essence of luxury.
Rule 6: Product Expansion
The introduction of a new product range in the luxury sector is a delicate dance between preserving brand heritage and evolving to meet changing demands. A successful product launch amplifies the brand's legacy, whereas a misstep can tarnish its esteemed reputation.
The Missteps to Avoid:
Boredom-Driven Change: Simply being weary of a product, feeling it’s lost its luxury status due to success, and desiring 'new blood' is not a valid reason for a launch.
Change for Change's Sake: A fresh team, eager to stamp their mark, can sometimes misguidedly attempt to outshine or replace legacy product lines. This can be a sign of misguided ambition rather than strategic innovation.
Misdirected Investment: Leveraging the profits from a successful range to fund the launch of a new product - the 'cash cow milking' strategy - can be dangerous. This approach can drain resources from the very product that is the brand's pillar.
Trading on Past Success: In industries like perfume, a new scent is effectively a new range. Reliance on the reputation of previous successes without substantive innovation or differentiation can be fatal.
A historical cautionary tale lies in the 1986 internal debate at Louis Vuitton. A dominant voice within the company believed that the ubiquity of the Monogram range had tainted its luxury status, advocating for a shift away from its core products. They misconstrued visibility with vulgarity, primarily brought on by counterfeiting, rather than understanding that true luxury transcends trend cycles.
The Right Motivations:
Creative Enrichment: Like Cartier's Pacha range of watches that coexisted with the Tank, Santos, or Panthère lines, a new product should augment the brand's universe, not overshadow existing offerings.
Enhance Existing Offerings: Louis Vuitton's soft luggage line, suitable as carry-on, perfectly complemented its traditional rigid trunks.
Expand Customer Base Without Alienation: Hermès ventured into silks, appealing to a younger audience without alienating their loyal clientele of fine leather goods and saddlery.
Strategically Upscale: It's about navigating higher price territories where the brand has legitimacy, but existing lines might not have ventured yet.
In essence, a luxury brand's strategy in launching new product lines should be driven by genuine need, creative vision, and a quest for brand enhancement, rather than mere novelty or perceived market pressures.
Rule 7: A luxury brand must have access products
A controversial rule. While the heart of luxury beats with exclusivity, growth and expansion often necessitate more inclusive strategies. This can be especially true for brands that face external pressures, such as the need to satisfy public market expectations and growth. More about it when we look at the 2 main luxury business models.
Yet, the inclusion of accessible products within a luxury brand’s portfolio isn't solely about immediate sales. This strategy is twofold:
Cultivating Tomorrow's Loyalists: These entry-level products serve as gateways, enticing a new clientele who, once they taste the brand's allure, might eventually gravitate towards its more opulent offerings. Think of how many have stepped into Rolex through their Oyster Perpetual line, only to later dream of a Day-Date or a Yacht-Master.
Catering to the Occasional Indulgers: Not everyone seeks a lifelong romance with luxury. Some consumers are akin to luxury tourists, making occasional splurges, perhaps not always brand-specific, but ever in search of that touch of opulence.
In essence, without broadening its audience, a luxury brand risks stagnation. A brand that doesn't continually entice fresh followers or occasional admirers may find itself not as a celebrated religion with a vast congregation, but as an isolated sect, appreciated by few but overlooked by many.
Part 3: Price and Distribution
While most industries live by the rules of supply and demand, luxury operates otherwise. The price is not just a number; it's a complex strategy aimed to sustain the allure of the brand. In this context, scarcity is an asset and accessibility is not always the goal.
Rule 8: Don’t Respond to Rising Demand
Counter to traditional business instincts, luxury brands don't scale up production to meet rising demand. The reason? To maintain an aura of exclusivity. The more available an item is, the less luxurious it becomes. This runs contrary to standard economic principles, which recommend increasing supply to meet demand.
Arguably the epitome of this strategy is the Hermès Birkin bag. Even if demand soars, Hermès intentionally keeps the supply low, leading to waiting lists that can span years. This calculated scarcity only enhances the bag's desirability.
Rule 9: Do Not Let Customers Dictate the Buying Experience
In most sectors, the goal is to make purchasing as easy and convenient as possible. However, luxury brands often do the opposite. By making the buying process selective or complicated, they add an additional layer of allure to the product.
Do you want to buy a Birkin, a Rolex or a Ferrari? Well, go to the store and ask for one. Good luck.
Rule 10: Do not leave distribution to 3rd parties
Remember, every step, every gesture matters. A luxury brand isn't merely about the product; it's an experience, a journey. For such brands, the distribution channel becomes not just a pathway to sales but the stage on which this experience unfolds.
Direct Control through Flagship Stores: Flagship stores are the epitome of brand immersion. They don't just house products; they are a tangible representation of the brand's essence. Through flagships, brands can ensure that every display, every interaction, echoes the luxury narrative they wish to convey.
Consistent Touchpoints Matter: Whether it's a product presentation or after-sales service, direct control over these touchpoints ensures a consistent brand experience. It's a curated journey where brands have the opportunity to impress, surprise, and delight their clients.
Risks of Third-Party Distribution: Leaving distribution in the hands of third parties can be a gamble. Not all third parties will understand or prioritize the nuances of a luxury brand experience. Moreover, the brand's story may be diluted, or worse, misinterpreted, leading to a potential disconnect with the clientele.
Take, for instance, the approach of brands like Chanel or Louis Vuitton. These brands predominantly rely on their boutique stores to provide a bespoke, immersive experience, ensuring that every interaction aligns with their heritage and ethos. By doing so, they not only elevate the purchase experience but also strengthen their bond with the consumer.
On the flip side, numerous luxury watchmakers opt to channel their products through retailers such as Bucherer, which was recently acquired by Rolex. While these retailers may offer stellar service, the luxury watch brands risk diluting their unique identity, as they are placed side by side with their competitors, making them comparative rather than unparalleled.
In summary, while third-party distribution might promise volume, luxury brands should prioritize the depth and quality of client interactions often choose to maintain direct control, crafting each touchpoint as a chapter in their grand narrative.
Rule 11: Perception Should Always Be Higher than the Actual Price
In the luxury world, price is something not to be mentioned, nor to be shown. The perception value is crucial. When a customer presumes that a product could or should cost even more than it does, the actual price becomes more appealing. This psychological pricing strategy adds to the brand's allure.
Louis Vuitton masterfully employs this tactic by offering a range of products from the reasonably expensive to the extravagant, making even their 'lower-end' items seem like a relative bargain.
Rule 12: Gradually Amplify Your Prices for Enhanced Demand
It may seem paradoxical, but luxury brands often find that raising their prices over time increases rather than dampens demand. The higher price point serves to make the item even more desirable, enhancing its status symbol quotient.
Chanel has been known for steadily increasing the prices of its iconic bags. Far from dissuading buyers, these price hikes often make older models more valuable and increase demand for new ones.
Rule 13: Elevate Consistently the Average Price Point
This rule dovetails with the previous one but focuses on the brand's entire range of products. Elevating the average price point across offerings can give the whole brand a more luxurious image.
Under the creative direction of Alessandro Michele, Gucci has steadily moved its product range upmarket, effectively raising its average price point and attracting a more affluent clientele.
Rule 14: Setting the Price
Price is more than just a reflection of costs and margins; it's a symbol of the brand's essence and the product's significance. Take for instance prestigious watchmakers like Blancain or Audemars Piguet; their ability to command million-euro price tags on limited-edition timepieces is a testament to the brand's unmatched symbolic value.
Freedom in Pricing Equals True Luxury: As put aptly by Rémi Krug of Krug Champagne, luxury is when the brand has the unparalleled liberty to define its price without a shadow of ridicule. It's an embodiment of its premium standing in the market.
Reverse Engineering the Price: Unlike conventional products where cost often dictates price, luxury operates in reverse. Brands start with a desired price point and then construct the product, balancing both its tangible features and its dream quotient, the latter being pivotal in determining its symbolic value.
Discovering the Symbolic Value: Setting the initial price closer to the lower boundary of the brand's price legitimacy zone and gradually elevating it, all while enhancing the offering, can help determine the balance between demand and perceived value. This approach is akin to exploring the depths of the product's dream potential and discerning its true symbolic value. Only when this equilibrium is attained can the brand fine-tune its pricing strategy, keeping in line with its broader objectives - be it growth, brand image, or profitability.
Divergence from Conventional Pricing: While traditional products launch with a premium, targeting early adopters, and then gradually decrease in price to attract the mass market, luxury brands employ a contrasting strategy. They aim to determine the maximum symbolic value their clientele ascribes to their product, ensuring the product is deemed luxurious yet remains attainable.
As we conclude our exploration of product, price, and distribution strategies in the luxury market, it becomes evident that these aren't mere transactional aspects; they are the foundational pillars upholding the brand's myth. From the intricacy of product creation to the nuances of pricing and the exclusivity of distribution, the world of luxury weaves a distinct narrative that diverges sharply from mainstream market practices. But understanding these elements is just the beginning. The true essence of luxury is as much about the intangibles as it is about the tangible.
The next chapter in our series will dive deeper, exploring the branding, marketing, organizational strategies, and the digital paradox inherent to the luxury domain. Stay tuned as we continue our journey.
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References & bibliography
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Pierre-Yves, D. (2014). A Business History of the Swatch Group: The Rebirth of Swiss Watchmaking and the Globalization of the Luxury Industry
Rambourg, E. (2020). Future Luxe: What's Ahead for the Business of Luxury
Sky Documentaries. (2022). Kingdom of Dreams.