“Luxury is often taken as a synonym for money”. (Kapferer, 2008). The word “luxury” is mostly related to rare and unique. It’s the money that converts your dreams to buy luxury items. The question I had in my mind that does the money decides which brand is luxury or not? Most people find the money to be the indicator of the quality and exclusivity. But we should not forget that the price tag of a product is decided by the supply and demand function, but in the case of luxury goods, the price tag is also influenced by craftsmanship or attention to its detail.
It’s even said that it’s not only the brand that prioritize your interest and influence decisions but also the money. Buying a luxury item with high price tag can boost confidence but also end up in huge debt.
A luxury good is known to be become a part of one’s identity. The reason is the attachment and feeling of representing yourself through that luxury item. Buying decision of luxury goods are based on prestige and uniqueness, not on technical and functional factors. That maybe is the reason that most high-end buyers don’t care about the money but want the best. In other words, they are mainly looking for an experience.
Indeed the luxury items are expensive but are they value for the money. That is actually the difference between expensive products (like ipad or television) which can be purchased by everyday consumers in almost any retail shop and has performance and functions which are value for the money but comparatively no emotional benefits. On the other hand, a luxury brand has to be spectacular good which are only sold mostly through flagship outlets and cannot be bought by everyday consumers. Therefore luxury product having emotional benefits cannot be matched to some extent with comparable product.
Therefore it has to be priced high but not too expensive that becomes a hindrance in the longing feeling for a brand. No doubt that the price tag is the source of income for a brand but keeping high price might not be in favour of success always.
However the price of luxury good may have to rise to match up with the customer’s perception and cannot be kept constant as it will look too low which will eventually cheapen the brand as compared to other luxury products.
Therefore I want to find out that is value of luxury dependent on money or not.
Does money evaluates the value of luxury goods?
X – Independent Variable – Price/Money
Y – Dependent Variable – Luxury Goods
I – Intervening Variable – Consumer Behaviour, Attitude, Perception, Income
M – Moderator Variable – Emotional Benefits, Quality, Design, Exclusivity, Functionality
(Consumer’s Behaviour, Income, Attitude and Perception)
(Emotional Benefits, Exclusivity, Functionality, Quality and Unique Design)
I want to understand that how the price plays an important factor to term a product “luxury”. In other words, what is the relationship between them?
The moderator variables are the characteristics of luxury goods which will have a strong impact on the relationship.
But the intervening variables are those that can change over a period of time and can influence the relationship. For example, if a person who desires for a luxury good and over a period of time, his income increases which will boost his purchasing power to buy luxury goods. But most of the time due the changes in trends, the attitude and buying behaviour will also change which will affect the relationship.
Majority of studies in microeconomics acknowledge that price is a variable in the function of margin, cost, supply & demand. It further explains that there is a direct relationship between quality and price. In other words, it’s the price that indicates the quality. Luxury objects, in economic terms, are those whose price/quality relationship is the highest on the market, ‘quality’ to the economists being something that they know how to measure, i.e. tangible functions. (Schroeder, 2006)
On the other hand, in microeconomics, it is also pointed out that price has an inverse relationship with quantity. Therefore, to maintain the status as ‘luxury’ which have to be widely desired and perceived as exclusive and scarce, the availability of luxury brands are rare or limited. Exclusivity is the minimal level of content that a luxury product must have, that is to say, image (low value and low pleasure) to show for which a major price is paid. (Chiari & Ward)
The primary goal for a marketer is profit which is earned by applying the suitable pricing strategy. Due to a first entrance barrier to luxury goods, in the form of high prices, these goods will always be out of reach for mass consumption. (Radón, 2012)
The price has to be high because it represents high quality but also competitive to survive in the market, and the brand must always be well known, for example Louis Vuitton, Gucci and Prada. (Chiari & Ward)
For an individual, in microeconomics studies, the utility of price of a good which a person pays for is equal to the utility of a good. But for luxury goods, the price not only includes the cost for producing it as well as the other cost such as time, transport, energy etc but also in a certain way, the price of a dream.
C:UsersRADHIKAAppDataLocalTempmsohtmlclip1 1clip_image001.png (Chiari & Ward)
In economics, a luxury good (such as a luxury fashion product) is a good for which demand increases more than proportionally as income rises, contrary to inferior goods or normal goods. Luxury goods are said to have high income elasticity of demand: as people become wealthier, they will buy more and more luxury goods. (Ward, Secondi, 2005, pp.7-8).
When commodities and services are priced higher, consumers with a high consumer surplus will purchase such goods. Economists believe this effect can take place because of the firms’ price differentiating strategies: customers are proud to pay more for the meaning the product has for them, not for its value. (Ward, Secondi, 2005, pp.7-8). Both of these factors act together to create an exception to the law of demand that can grow because the consumer sees others purchasing the product- the so-called “bandwagon effect” (A psychological phenomenon whereby people do something primarily because other people are doing it, regardless of their own beliefs) – or fall, for precisely the same reason – the so-called “snob effect”( Situation where the demand for a product by a high income segment varies inversely with its demand by the lower income segment). (Thomas, 2007, web page)
This is a general model which shows the different level of measuring the price against the product quality. The premium pricing strategy is done for luxury goods and is also accepted by the customers. (Okonkwo, 2007)
Luxury brands have a low functional utility to price ratio (Chiari, 2007), but a high intangible utility to price ratio. A McKinsey report defined luxury brands as those which “have constantly been able to justify a high price, i.e. significantly higher than the price of products with comparable tangible functions” (Kapferer, 1997). But the high intangible characteristics and benefits of luxury goods justify the price. (Okonkwo, 2007)
This also means that the more emotional a luxury brand is, the more inaccessible the price becomes, as illustrated in the picture below.
(Chiari & Ward)
The Value of Emotions and Pricing for Luxury Goods
(Gathen & Burkhard)
Simon. Kucher & Partners (SKP)has developed an emotion-based pricing framework for luxury goods companies. This pricing framework delivers a holistic approach to analyse the current pricing situation, identify room for improvement and implement quick-wins as well as long-term pricing principles.
The starting point of any pricing analysis is the pricing strategy of a company. Price setting has to be aligned with this strategic input. Only then can price implementation dealing with the management and the control of point of sale prices be optimised. Finally, the basis of successful pricing is a suitable pricing organisation. (Gathen & Burkhard)
To identify the value-to-consumer of a product, it is necessary to understand the two components of any value proposition: functional and emotional value drivers. The functional value components constitute the base of a product and are most important in terms of private label pricing. In contrast, the emotional value of a product determines the premium of a luxury good. Emotional desires like prestige and indulgence need to be quantified to set profit-optimal prices. (Gathen & Burkhard)
With that theory as basis, the branding and marketing department can work on building campaigns which can be focused on including more positive emotions into their goods.
BPM (Behaviour Perspective Model)
It is a research framework on customer buying behavior based on economic psychology. BPM provides us a comprehensive framework to explain the pricing mechanism of luxury goods. (Du, April, 2009)
Figure 1. BPM (Foxall, 1993)
Customer behavior setting refers to the environment in which antecedent events that influence the customer behaviour occurred, it facilitates or inhibits the customer’s choice. Four key stimuli may operate in it: physical, social, regulatory and temporal.Learning history is the accumulative experience of a customer in the past which will influence current buying behaviour it reflects the buying behavior difference among individuals as well. (Du, April, 2009)
Utilitarian and informational Reinforcement are direct satisfaction derived from buying and consuming the goods and indirect feedback on consumer’s buying behaviour.Aversive stimuli are the cost of consuming economic goods on both utilitarian and informational punishment. For example, a customer must pay out money or may have to wait in a big queue when make a certain consumption. (Du, April, 2009)
Methodology and Data Collection
The method I will choose which is suitable for my thesis is questionnaire, study of focus group.
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