What is it about some brands, and their prices?
The price of anything is just a function of supply and demand, and the item’s utility, right? Isn’t that what classic pricing theory tells us, and what we tell each other?
What if I told you there was more to it, a LOT more? What if I could prove it?
The Swiss watch federation (FHS - Fédération de L'industrie Horlogère Suisse) estimated that worldwide watch production was about 1 billion watches in 2018 - but not including what Japan produced (which is omitting a lot of watches). The year before, it was about the same. And the year before that, and the year before that.
But the world’s population is just 7.7 billion people. Many are too young to wear a watch, or can’t afford one, or simply choose not to wear one. And yet the watch industry is producing enough watches for 1 in every 5 people on the planet to get a new watch – EVERY year.
Clearly, there’s a ton of supply. If classic supply-vs-demand pricing theory held true, watches should be very cheap, since there’s so much supply, much more than the demand could logically be, just based on their utility.
Some watches are very cheap. Many watch brands are stuck in a downward spiral of discounted prices. Meanwhile, other brands seem able to charge whatever they want, and raise prices every year, much faster than the rate of inflation.
Prices for luxury goods like watches aren’t simply driven by supply and demand, or their utility value. The problem with using supply vs demand to understand how watch pricing works is that the classic economic theory is just that – a theory.
The theory assumes everyone is rational, and it treats every product like a commodity - something you can get anywhere, at any time, from multiple sellers. The theory focuses all the attention on the PRODUCT – its supply, its demand, and its utility.
Luxury good pricing defies classic theory, because there’s an element of psychology involved. To understand luxury goods’ prices, we have to focus our attention on the CUSTOMER – their beliefs, their desires, their feelings.
To understand the behavior of luxury goods buyers, we need to get inside customers’ heads, if we want to understand why some brands can maintain prices higher than their competitors, and why other brands can’t.
There’s been a good bit of academic study into this, which has led to a number of principles smart brands use to their advantage. They do things differently, to reinforce the thinking they need customers to have, in order to maintain their brand image and support their prices.
Within Microbrand University’s business accelerator workshop, we’ll explore some of these best practices. But for now, consider these 10 questions…
1. How do luxury brands structure sales incentives (“discounts”) to avoid damaging brand prestige?
2. How do luxury brands ensure customers can’t save money by buying the same product elsewhere?
3. How do luxury brands replicate the in-store experience when customers are shopping online?
4. How do luxury brands always attract new customers at just the right time?
5. How do luxury brands position products in such a way that customers make favorable comparisons?
6. How do luxury brands get customers to consider some products to be a “bargain”?
7. How do luxury brands increase customers’ sense of brand loyalty?
8. How do luxury brands get customers to be ambassadors for the brands’ quality?
9. How do luxury brands promote the image they want in a sub-conscious way?
10. How do luxury brands use small differences in pricing to make a big difference in buyers’ perceptions?