Pricing Indicates Brand Positioning

Pricing is one of the first indicators of a brand’s positioning to consumers.  Luxury and prestige brands have traditionally adopted the premium pricing strategy to emphasize the brand strength, high quality and exclusivity associated with luxury goods, and also to differentiate them from the mass-market fashion brands.  The luxury target audience is less price-sensitive and actually expects luxury goods to be premium-priced rather than economically priced.  

Pricing forms a part of the branding process as consumers often judge the position of a brand and the value of a product in terms of price.  To explain further, the price of luxury products is significantly higher than the price of products with similar tangible features, but the high intangible characteristics and benefits of luxury goods justify the price.

On top of that, luxury goods are seen as reliable because final prices do not change even if input prices changes, and this builds customer trust.  Prices rarely change, and if they do, notices are sent to existing customers, and information about forthcoming price changes are displayed, so there are no surprises to customers.  Another interesting note about the prices of luxury goods is that they are usually in even numbers, as odd numbers generally give the impression of trickery.  

However, the strategy behind pricing decisions for luxury products requires meticulous evaluation and control.  As pricing is the only direct revenue generator among the Ps of the marketing mix, it holds a delicate position and calls for a clear set of objectives behind its strategy.  Since luxury brands are premium priced, the pricing objective and emphasis is on profitability and return on investments.

The pricing strategy for luxury goods also includes an evaluation of some key objective:

-   First, the overall cost of purchasing a product for a consumer incorporates the price-tag on the product as well as several other ‘costs’ such as time, energy, transport, mental effort and psychological costs.  These factors are important in evaluating consumer responses to pricing, so the overall costs of obtaining the product must be evaluated.

-   There’s also the customer aspect which involves ensuring that there is a ready consumer market willing to pay the set price for the products and services offered.  In the case of luxury brands, customers generally accept the premium pricing strategy.

-   Another important factor in pricing decisions for luxury goods is analyzing the external market demand factor.  This involves the responsiveness of the level of demand to changing or increasing prices.  In technical terms, it is done through checking the price elasticity of demand.

    Pricing also has to be checked against those of competitors.  For example, the classic Hermes Birkin bag retails for approximately €4,000 while its considered equivalent at Chanel costs about €2,500.  For some customers, this could mean that the Hermes bag has more value than the Chanel bag while others might perceive the Hermes bag as overpriced.

The luxury pricing strategy can also be used as a publicity generation tool.  For example, the delicacy known as the Golden Phoenix cupcake is made using premium Ugandan vanilla beans and cocoa, Italian organic flour and many sheets of 23-carat gold wrapping, and was designed to be entirely edible.  The Golden Phoenix can take up to 48 hours to prepare and, more distressingly, must be eaten in 15 minutes or its chocolate will melt, causing the gold flakes to peel and altering the flavour profile.  This cupcake is sold for $27,000 in Bloomsbury’s Bakery in Dubai, which aims to bring London’s quality confections to the UAE.  Even for Dubai, $1,800 a minute is still a relative bargain.  No potential buyers have stepped up so far.

http://www.alwen.fr/media/img/gen/5_contexte/veille/luxury04.jpg

http://t0.gstatic.com/images?q=tbn:ANd9GcQ9RZv_sjHKZvN7MYo6APmA4KO52ZQmdGX_5IY_m8EwzUUoPtNa3Q

http://blog.alesyabags.com/wp-content/uploads/2010/04/hermes_birkin.jpg

http://t3.gstatic.com/images?q=tbn:ANd9GcQxYJni66FZUSqx6W-enhSFbTGLR3hIHd_JqEUM_hPcfpM0tEVkeg

http://img.izifunny.com/pics/20120716/640/golden-phoenix-cupcake-6-pics_1.jpg

http://books.google.ca/books/about/Luxury_Fashion_Branding.html?id=a_6CublRtYwC&redir_esc=y

http://www.vaultmagazine.com/uncategorized/introducing-the-27000-golden-phoenix-cupcake/

 

No crisis for Luxury goods!!

Lately, in 2008, the world was hit by the financial crisis. Not the Luxury sector though!

v  LVMH, the world leader in the luxury sector, saw its sales jump 26% in first half of 2012.

v  Richemont’s (Cartier, Montblanc, Van Cleef & Arpels and Jaeger-LeCoultre) operating income has increased by 20% during the second half closed on September 30.

v  The Italian Prada has announced an increase in its profit by 36.5% in the first half of 2012 (37.3% in Europe).

v  The luxury division of PPR, the other French sector, saw its sales increase by 30.7% in the first half of 2012.

 

 

These results were clearly in contrast with the decline recorded by other industries. The luxury good industry seems to have fly through the crisis recording the highest growth in the sector. A paradox that the media talked about a lot, providing three main explanations to the phenomenon:

1.       The rising inequalities partially explain the diagnosis.

2.       Such results also come from the larger middle-classes. They were the ones who were really affected by the crisis and had to tighten the belt on necessary and common products, thus increasing their frustration. They would then spend in luxury product in order to free themselves from frustration and as both an aspirational and a status symbol!

3.      Increasing prices of luxury goods during the crisis helped increase both sales and revenue. The price of Burberry gabardine raincoat has been multiplied by 5.6 and the price of a Rolex Yach-Master rose from 5 488 to 39 100 euros. Those increases in prices simply indicates the strong and growing willingness to pay of the richest for whom price is no more than a differentiation criterion and desirability. “the more expensive the more desirable”!

 

Source: http://www.ofce.sciences-po.fr/blog/?p=2656

 

Cartier and Mercedes-Benz: Luxury Pricing in Practice

Cartier

"The Jewelers of Kings and the King of Jewelers"

Cartier jewelry is often known as the king of the jewelry industry. The company was founded in 1847 by Louis-François Cartier in Paris, France. As a high premium brand, Cartier sells to royalty and those who seek to live like kings. In 1902, King Edward VII of England purchased Cartier for his coronation. The tradition of purchasing Cartier by members of the royal family has been continued throughout the last century. In fact, Kate Middleton wore a Cartier tiara for her wedding to Prince William in 2011.

The Cartier Price 

In 2006, Cartier is the company that generated the most revenue in the 50 billion pound jewelry industry. Their strategy is to set different prices to different types of customers. However, in 2001, Cartier made a mistake. They decided to drop their entry-level products which were priced around 500 pounds in order to increase the perception  of the Cartier brand. Unfortunately, this decision backfired on the company. Many of their customers were entry-level buyers. As a result, the company's revenue dropped by 10%. Cartier reacted quickly. The company introduced their new Trinity Ring, a new entry-level product. The Trinity Ring has been extremely successful among customers to this very day! 

Mercedes-Benz

Mercedes-Benz was founded in Germany in 1924. Innovative engineering features were the main reason the brand became popularized. Initially, as a pricing strategy, Mercedes-Benz decided to mark-up their prices in order to achieve premium brand status. However, by contrast to Cartier, Mercedes-Benz's strategic approach for expansion was to start targeting entry-level customers. For example, Mercedes-Benz introduced new A-class vehicles for entry-level buyers. Unfortunately, this decision diluted the Mercedes-Benz's brand which resulted in decreased revenues in the long-term.

As we can see from the examples of Cartier and Mercedes-Benz, setting the right price is essential to maintaining brand equity in the luxury brand industry.

Sources

• http://jill47.hubpages.com/hub/The-History-of-Cartier
• Get Cartier! Defending a Crown (Video)
• Matt Haig (2011), Brand Success: How the World’s Top 100 Brands Thrive and Survive, 2nd edition, Kogan Page (pg 25-27)
• http://en.wikipedia.org/wiki/File:Cartier_logo.png
• http://www.miamiweddingplannerblog.com/cartier-trinity-ring/
• http://lisawallerrogers.wordpress.com/2011/04/29/kate-wears-queens-tiny-tiara/
• http://upload.wikimedia.org/wikipedia/en/4/48/Mercedes-Benz_logo.svg

How to Build a Luxury Brand

It's hard to talk about luxury without defining it.  However, luxury is a difficult thing to define.  It's similar to what U.S. Supreme Justice Stewart once said: "I know it when I see it".

For example:

Not luxury:



Luxury:



Not Luxury:



Luxury:



Not Luxury:



Luxury:



You get the idea.

But what actually makes one of these products a luxury good and the other something else?

An economist might give you one of several definitions.  For example, a luxury good is:

• anything that isn't necessary;
• a superior (vs. inferior) good;
• anything with high price elasticity; or
• something with negative price elasticity.

Great.  These are about as helpful as Justice Stewart.

What we really want to focus on is how to establish a brand as a luxury brand.  This way, this brand's products will have a high and negative price elasticity.

Looking at existing luxury brands, similar broad strategies are typically applied:

Step 1: History

Establishing a new luxury brand may actually be quite difficult, because most luxury brands are closely associated with their history.  As a result, the first step may be to appropriate an existing long-established brand.  Just make sure you do so in an authentic way, because you're trying to build trust with your customers.

Step 2: Product

When building your product or delivering your service, be sure to focus on absolute quality instead of relative quality.  It's not good enough to be best in class; your product must be the best, period.  For example, if you're building a new sports car, and your differentiating feature is power (vs handling, looks, interior, etc.), it's not enough to have more horsepower than your competitors.  Instead, you want the most horsepower you can possible put in the car.  As a reference, see the Bugatti 1001 horsepower Veyron:

Step 3: Place of Sale

It's not enough to build the best product.  You also need to control its sale to keep it exclusive.  This way, any Joe Shmoe can't just walk to the local department store and pick one up or, worse, go to a hock shop and get a used one for $1.50.  Instead, you should follow Cartier's example and be hard to get (and highly controlled by the manufacturer).  Further, when you do find a store that sells the product, the shopping experience should be just that - an experience.

Step 4: Promotion

If you want your brand to be a luxury brand, shift your focus far away from infomercials and look instead at how you can gain publicity for your product.  Think, for example, of Rolex.  While Rolex does occasionally advertise in mass media, their real promotion activities are centered around celebrities who embody the Rolex lifestyle.  There's a reason that Roger wears a Rolex whenever he wins Wimbleton.

Step 5: Price

Once you've gone through the steps of developing an exclusive luxury brand, you need to decide how exactly to price your product or service.  You expect the price will be high, but how exactly to decide?  For the answer, you'll have to wait for a future installment, which focuses completely on pricing considerations!

What is Luxury? A Look at its Origins and Development Over Time

Welcome to Group 8's Strategic Marketing Blog. This week, we've chosen to dive into a very interesting topic, the pricing of goods. More specifically, we'll be take a look into the pricing of luxury goods. Throughout the week, members of the group will be providing their findings and personal insights on this subject. But before we dive into the pricing of luxury goods, we first must examine, what is luxury?

The Oxford dictionary defines luxury as "a state of great comfort or elegance, especially when involving great expense" with the origins of the word tracing back to the Middle English term, lechery, meaning "excessive or offensive sexual desire; lustfulness." While this word dates back to the 1700s, the concept of luxury however, has been around in one form or another since the start of civilization. At the highest level, luxury goods could be considered anything that is held in exceptionally high regard when compared to regular items or services. In Christopher Berry's book, "The Idea of Luxury: A Conceptual and Historical Investigation", he begins to look at luxury during the Roman period. Romans, who were originally averse to the concept of luxury items, began to embrace the concept as they began to conquer other early civilizations such as the Greeks who valued these types of goods more. Soon after, the daily life of the more affluent members of this society began to become more focused on pleasure and extravagance whereas previously, power and influence could be seen as the primary objective. As time moved on, the concept of luxury and the desire for it grew and even permeated various religions as churches were erected with marble, gold and other ornate objects.

By the time the world reached the 1700s, the concept of luxury was full blown thanks largely in part to global exportation and international trade. During this period, every seafaring nation was sending ships to all corners of the globe in search of luxury goods of the time; sugar, spices, gold, silks etc. Although luxury has been around as long as civilization, it's accessibility has changed. During the time of the Romans up until the 1700s, the consumption of luxury goods was only something that was really limited to the most elite social classes. Since then, we have seen a shift away from this with the rise of new product categories created specifically within the luxury market to appeal specifically to middle class consumers. These products are sometimes referred to as "accessible" or "mass luxury" goods.

Although luxury items and brands as we know them today have a much broader appeal, luxury is not without it's controversy and critics. When we discussed the topic, words that came to the surface are greed, vice, extravagance, unnecessary and over-indulgence, just to name a few. In fact, the criticism of luxury goods and their relevance is as old as the concept of luxury itself. The Romans were the first create laws and put restrictions on luxury goods by capping spending on banquets and other luxury items of the time. More recently, the government in the US banned luxury showers in 2010 due to their harmful impact on the environment, and in 2012, the Chinese government banned the advertisement of all luxury goods on its official state radio and television channels.

Despite all this, luxury brands are not showing any sign of slowing down as the market continues to grow globally. The current trends we're seeing today in the modern luxury market is that of globalization, consolidation and diversification. Globalization has led to these types of goods being more prevalent all over the world with more brands on offer, while consolidation has led to the growth of large companies which produce a large variety of brands across different segments within the luxury market. The an example of one such firm is Louis Vuitton Moet Hennessy (LMVH), with annual revenues of approximately 20.3 million euros, making them the largest luxury brand company in the world.