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.

In a New York Times piece, the famous Nobu Ryokan in Malibu was tested. The feeling the author described in the headline was, “The anxiety of the US$2,300-a-night hotel room.” He meticulously breaks down the experience and states, “With a 4pm check-in and noon departure, that comes out, pre-tax, to US$115 an hour.” He added that the price of staying two nights would probably allow him to fly to Japan and experience an authentic ryokan, everything included. He also noted that a coffee was US$12, a price he may still remember years later. His final conclusion: “Sometimes too much really is too much.”

This description shows that when a service, in this case a luxury hotel, is unable to give the guests a reason for its high prices, the hefty cost will be broken down to the extreme, leaving the guest with a feeling of disappointment. In the worst case, if a charge for additional services (think of the coffee) is perceived as outrageous, then the entire experience collapses and becomes a series of perceived rip-offs.

An acquaintance who – pre-pandemic – flew regularly from Los Angeles to her hairdresser in Abu Dhabi (of course in first class) to get a US$1,500 hair cut, could talk for hours about how the hairdresser is overcharging on water and coffee. It tainted her entire experience. I would advise the hairdresser to include the coffee and increase the price of the entire service. This would avoid creating an unnecessary pain point and let the customer focus on the core experience they are willing to pay for.

However, this requires that the hairdresser – to use the example – is creating ALV in the first instance. In many of our brand audits we find that many services don’t have a clear and consistent understanding of how they are creating the extreme value that is needed to be able to charge for a luxury price. As a result, many of these businesses struggle and often shut down after an unsuccessful period.

The main mistake is to confuse a beautiful space with value creation. In luxury, consumers always expect to be indulged. This is priced in already and does not generate a significant premium. Instead, luxury services need to become more aware of ALV and refocus their entire value creation model on it.

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