Opinion / The one pricing mistake luxury services make? Misunderstanding the concept of ‘added luxury value’ and how it affects what a customer will pay, even for premium services
Checking into a US$2,300-a-night hotel like Malibu’s Nobu Ryokan doesn’t just come with an expectation of superb facilities, but to be made to feel a certain way – it’s this that brands often get wrong
This article is part of STYLE’s Inside Luxury column
Pricing a luxury is one of the most elusive managerial tasks. This is especially true for services. From a customer perspective, services are produced in the moment of consumption. This makes it very challenging to understand the added luxury value (ALV) that drives the willingness to pay.
Let’s first start with ALV. In my view, it is one of the most fascinating concepts in managing luxury. Sadly, it’s often neglected, which can lead to catastrophic results. The principle is simple. We pay for what we perceive something is worth.
This is the case for ordinary services such as sending a package in the mail, ordering food for dinner, or getting a manicure. For each of these we understand what such a service would normally cost – this is called the reference price. If we anticipate a little better service, we may be willing to pay slightly more. The same is true in case we need a service faster or more easily. Then we may pay a premium for speed or convenience.
With luxury, the same principle applies, but the way we perceive the value is different. Luxuries have a distinct value component, the aforementioned ALV. This component is not driven by product or service related features but instead by anticipated psychological and social status effects. One of them is the anticipation of experiencing something new, another is the perception of protection. A third powerful driver is the expectation of being perceived as more attractive.
I have often called these values the hidden drivers of luxury. They are hidden because we are not always aware of the precise reasons we choose a luxury over something ordinary. However, my research clearly shows that luxuries significantly change the perception of how people judge themselves and others. Intuitively we expect to gain attractiveness, feel more protected and have new experiences, among other things. In my research, I was able to isolate more than 10 of these intangible drivers.
The catch: many luxury brands ignore them and confuse other factors as the drivers of luxury value. For example, many hotels focus much more on the design of the property than on what drives ALV. They then attach a high price point but often don’t provide the value proposition. A guest may book the hotel intuitively expecting to receive significant ALV, only to find while experiencing the service that there is nothing special. This leads to a dramatic mismatch between expectations and perceived reality. The result: a breakdown in experience and loyalty.