OpinionAre Hermès, Dior and Louis Vuitton goods too cheap? Luxury labels are losing billions of dollars by failing to include the brand story in the sticker price
Many luxury brands underestimate their pricing potential. The more rare, differentiated and unique something is, the trickier the pricing. Although it is impossible to estimate how many brands are priced wrongly, research suggests that the majority make significant pricing mistakes.
This has huge consequences. Since the price carries a value signal, consumers may be confused if they perceive a brand’s pricing not to match the perceived value. This leads to a decrease in brand preference. And even if consumers still buy, many brands could be dramatically more profitable with the right pricing.
In a recent discussion with the CEO of a fashion brand, he told me his biggest regret: “We set the initial pricing far too low. We thought that we were expensive. Our clients saw it differently. They thought we were too cheap for what they got. If I could launch my brand again, I would double the price, at least.”
His words did not come out of greed, more out of desperation. The low price positioning hampered the success of the brand by simply not generating funds to cover operational costs and the necessary investment in brand equity. When a CEO of a luxury brand tells us that he would double the price after everything he knows now, other brands should listen. The likelihood is that their pricing is wrong, too.
This is a critical insight. It is never a single product that creates extreme value. When brands create extreme value, they do it through their brand story and exceptional experience. This story-driven value component is critical for luxury brands.
A common reason is a lack of training in and knowledge of luxury pricing tools, or use of pricing tools that are similar to the ones everyday brands use, which leads to incorrect results. It is relatively easy to price an everyday product. Products like milk, bread, water, a cheap T-shirt or a compact car, to name a few, have reference prices. We know how much a typical product costs and expect the prices of “similar” items to be similar. This is why a bottle of sparkling water costs US$1-3, but most likely not US$5 or US$10. The reference price sets a cap in our mind of how much we are willing to spend for similar products.
So, if luxury creates extreme value through its backstory, why are so many luxury brands putting so little emphasis on storytelling and on non-linear pricing strategies? Instead of brand equity building through appropriate pricing, brands often default to the mass-market tactics of imitating other brands’ pricing and promotion. The result is often fatal and can take years to correct.
A much stronger focus on luxury pricing will be make or break for luxury brands, especially as they prepare for a post-pandemic future. With Generation Z, a much more educated and brand-conscious consumer group is entering the market, making pricing mistakes even costlier. The stakes for luxury brands were never higher.
- Dior’s Nike Air Jordan trainer was priced around US$2,000 and currently trades at between US$7,000 and US$20,000 on platforms like Stoxx and Sotheby’s
- From EVs to NFTs, getting your price right means thinking beyond the bottom line, and harnessing the pulling power of a brand’s elusive Added Luxury Value